Monday, July 11, 2011

The Road to Default: Debt Ratio Comparison's With Previous Episodes

In 2009, Carmen M. Reinhart and Kenneth S. Rogoff wrote a book titled ,"This Time Is Different" about debt and financial crisis. One of their charts will provide a benchmark for us in our analysis.  This chart can be found on page 121 of the book and shows the ratios of public debt to revenue immediately preceding an external default.  For Africa the external debt/ revenue ratio was 1, Asia it was 1.5, in Europe it's 1.6ish and for Latin America its closer to 3. As the following chart explains our current ratio in the United States is around 1.7ish which is higher than in Africa, Asia and Europe at the time of an external default.
Additionally the chart in "This Time Is Different" also compares the ratios of total debt to revenue at the time of the default.  For Africa is was 2.6ish, in Asian countries the ratio lies around 4, in Europe it hovers around 3.75 and for Latin America around 4.6ish. As the following chart shows, we are considerably past this doomed territory with a public debt-to- revenue ratio of around 5.61 and climbing. The following graph I did in R because it just seemed easier. 

 So the lesson's learned today are that by history's benchmarks the U.S. is way past the point of no return and all we can do is hold on for the ride of a lifetime or prepare for the Federal Government to cut spending by a large enough amount that real GDP growth will most likely slow to a stall. It's a lose-lose situation. Prepare for pain, but keep dancin',

Steven J.

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