Private Debt Menaces EU Recovery
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  • Bruce

    Don’t diminish the importance of the government debt as well. Regarding the whole worldwide debt situation: “That which is unsustainable will end.” The end will probably be very, very painful.

  • wigwag

    Debt as a percentage of GDP tells a very incomplete story. Remember, solvency isn’t just about debt, it’s about assets as well; the article in the Economist ignores this critical piece of the financial puzzle. Debt isn’t the most telling statistic, net worth is really what you want to know.

    In the United States, for example, total debt as a percentage of GDP increased substantially during the recent economic downturn (although this is now making an about-face). The increase in debt as a percentage of GDP whipped economic know nothing’s into an apoplectic frenzy.

    What these chicken littles never took notice of was the fact that total assets ranged between 1,300 and 1,400 percent of GDP even when things were at their worst. In fact, total debt as a percentage of GDP never exceeded more than 50 percent of total assets as a percentage of U.S. GDP and that was in the worst economic downturn since the 1930s.

    Professor Mead makes a habit of deriding all the chicken littles predicting environmental disaster. It makes me wonder about his penchant for flirting with the chicken littles who believe debt levels presage economic disaster.

    • rheddles

      Both income (GDP) and the balance sheet (assets) are important to determining capital, capacity and collateral. But then there are conditions and character. Neither is positive, particularly in the political arena. What has become habit in the public arena is seeping into the private. No one is ever over-levered until they can neither pay off nor roll over a maturity. Fire sales of assets are not a good way to pay off a maturity, free cash flow from operations is.

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