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Thursday, December 27, 2012

Debt problem in perspective

There is a pretty big flaw in popular economic thinking.  Many economics textbooks today teach that since one entity's debt liability is another entity's asset, the total amount of outstanding debt is unimportant.  Really.  Debt is only an asset if it gets paid back.  If the rise in income does not keep pace with the rise in debt it becomes more and more difficult to pay the debt back.  If that condition persists long enough large scale defaults are probable.  Large scale defaults like those that occurred in the great depression can be quite debilitating to the economy.  Many people realize we have a debt problem in this country.  However, I don't think most people realize it is a world wide problem.  Lets look at some numbers.

Here is a chart of global debt from 2010, the latest number I could find.


I would say that was approximately $195 trillion.  How about the population.


Lets round that down to 7 billion which is probably not too terribly far off of where we were at the end of 2010.  That means the per capita debt in the world is 195,000,000,000,000 / 7,000,000,000 = 27, 857.  The world has nearly $28 thousand of debt for every man, woman, and child alive.  That kind of seems like a rather large and unhealthy number to me.  When we look at global income it sounds even bigger.  The National Geographic site has some interesting data in that regard.


This chart shows the distribution of per capita income and population density in four different categories.  Here is an interesting break down of the number of people in each category.

This is from page 2 on the map above.  There are 5 billion people with an income less then $3,945.  There are only 2 billion above that level.  That nearly $28 thousand in per capita debt looks even bigger now doesn't it.  Is it possible the debt has reached a level where it has become a drag on global growth?  Is there a risk of large scale defaults around the globe?  I guess we will find out as the global recession deepens.


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