Politeía Digest

Quis custodiet ipsos custodes?

The Economist Corner – essential readings X

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Financial markets

Buttonwood’s notebook

Indebtedness after the financial crisis THE headlines are all about sovereign debt at the moment. But that is only part of the problem. Debt has risen across the economy, from consumers on credit cards, though industrial companies borrowing for expansion and financial companies using debt to buy risky assets.

The interactive graphic above shows the overall debt levels for a wide range of countries, based on data supplied by the McKinsey Global Institute. In theory there is no maximum level for debt relative to GDP, but Ireland and Iceland (not on this map) found the limit in practice when they hit eight-to-ten times GDP.

The debt is also broken down by sector. Note the huge size of Britain’s banks relative to its economy, and the high level of Spanish corporate debt. These figures will worry owners of government bonds since the 2008 crisis showed that governments may be forced to stand behind private sector debt.

We have also updated a table we published in February, ranking countries in terms of their primary budget balance, debt-to-GDP ratios plus the relationship between the yield on their debt and economic growth (if the former is larger than the latter, the debt burden is getting steadily worse). Spain has now taken over from Greece as the country in the worst position. Here’s the table:

 

Stanley McChrystal goes

After McChrystal

Barack Obama has sacked his commander in Afghanistan. But the real worry is that the war is being lost;  June 24th 2010.

THE national security adviser of the world’s greatest superpower is a “clown”, its vice-president a nobody and its president “uncomfortable and intimidated”. With those words the officers around General Stanley McChrystal, the American commander in Afghanistan, engulfed America in a storm as damaging to its war effort as any Taliban raid. America rightly sets great store by civilian control of its armed forces and on June 23rd a distinctly unintimidated President Barack Obama made General McChrystal pay for his insubordination with his job. But presidential decisiveness cannot conceal a deeper truth. America and its allies are losing in Afghanistan.

Mr Obama had every reason to cashier General McChrystal. Officers, including his predecessor, have gone for less. Not to act could have left the president looking weak. And yet it was a heavy price to pay. Nothing could cheer the Taliban more than seeing General McChrystal out on his ear. He is a master of counterinsurgency (COIN), he was one of the few Americans who could work with President Hamid Karzai and his hand-picked commanding officers are in charge of a forthcoming operation in Kandahar that will probably determine the course of the campaign. To Mr Obama’s credit, his place has been filled by General David Petraeus, the star of the war in Iraq and the man who wrote the manual on COIN. Even so, the dismissal leaves America’s campaign pitched on the edge of failure.

Mr Obama once described the fighting in Afghanistan as “a war of necessity”. The president must now put necessity aside and pose two fundamental questions. Can the American-led coalition still win in Afghanistan? And if so, how? Read more in The Economist.

The age of easy credit and its aftermath

Is there life after debt?

Rich countries borrowed from the future. Paying the bill will be difficult, and so will living in a thriftier world; Jun 24th 2010.

DEBT is as powerful a drug as alcohol and nicotine. In boom times Western consumers used it to enhance their lifestyles, companies borrowed to expand their businesses and investors employed debt to enhance their returns. For as long as the boom lasted, Mr Micawber’s famous injunction appeared to be wrong: when annual expenditure exceeded income, the result was happiness, not misery.

For a long time debt in the rich world has grown faster than incomes. As our special report this week spells out, it is not just government deficits that have swelled. In America private-sector debt alone rose from around 50% of GDP in 1950 to nearly 300% at its recent peak. The origins of the boom go even further back, reflecting huge changes in social attitudes. In the 19th century defaulting borrowers were sent to prison. The generation that lived through the Great Depression learned to scrimp and save. But the wider take-up of credit cards in the 1960s created a “buy now, pay later” society. Default became just a lifestyle choice. The reckless lender, rather than the imprudent debtor, was likely to get the blame.

As consumers leveraged up, so did companies. The average bond rating fell from A in 1981 to BBB- today, just one notch above junk status. Firms that held cash on their balance-sheets were criticised for their timidity, while bankruptcy laws, such as America’s Chapter 11, prevented creditors from foreclosing on companies. That forgiving regime encouraged entrepreneurs (in Silicon Valley a bankruptcy is like a duelling scar in a Prussian officers’ mess) but also allowed too many zombie companies to survive (look at the airlines). And no industry was more addicted to leverage than finance. Banks ran balance-sheets with ever lower levels of equity capital; private equity and hedge funds, which use debt aggressively, churned out billionaires. The road to riches was simple: buy an asset with borrowed money, then sit back and watch its price rise.

All this was encouraged by the authorities. Any time a debt crisis threatened the economy, central banks slashed interest rates. The prospect of such rescues reduced the risk of taking on more debt. Bubbles were created, first in equities, then in housing. It was a monetary ratchet, in which each cycle ended with much higher debt and much lower interest rates. The end-game was reached in 2007-08 when investors realised a lot of this debt would not be repaid. As the credit crunch tightened, central banks had to cut short-term rates to 1% or below.Read more in The Economist.

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Written by Theophyle

June 25, 2010 at 4:00 pm

One Response

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  1. Very nice information.


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