Tuesday, May 3, 2016

Economics 101 – Debt

First and foremost, it's very important to differentiate between public debt and external/foreign debt. Public debt compares the cumulative total of all government borrowings less repayments that are denominated in a country's home currency. Public debt should not be confused with external debt.

External / Foreign debt is debt that is owed to foreigners. In most contexts, external or foreign debt means debt that is owed by the government to foreigners, although in a globalized world, it can in some contexts mean debt that is owed by national entities (governments, national based companies, and private individuals) to foreigners.

This means that most public debt in a country is still owed to its citizens. One of the things this means is that when we pay back the debt, the money will still be inside our economy, where hopefully it will stay and recirculate.

However, when we pay back foreign debt, it essentially leaves the economy, and transfers its purchasing power to another economy. It's interesting to note that Japan, even with its huge public debt has relatively little external debt.

This isn't the case for the UK, that owes hundreds of billions to Germany and Spain – while its banks are on the hook to Ireland, Italy and Portugal. Iceland and the Netherlands aren't looking too good either.

In a similar situation but to a lesser extent are France, Spain or the USA, the later with the largest amount held by China and Japan.

Clearly, there appear to be too much unproductive debt and it would be nice if governments began to behave like normal citizens, I mean the one that spend no more than what they earn!

No comments: