What goes up must come down. It's been a buoyant few months and the market is struggling to stay above the April highs.
Could it be the latest sovereign debt crisis across the briny in fair Ireland? At that moment a leprechaun must have whispered in my ear "Enid, invest in countries with no sovereign debt". Eureka I bleated, what a remarkable insight. Off to the the source of all knowledge, Wikipedia, where I found a list of countries external debt. Quickly I scrolled to identify the countries with zero debt as a percentage of GDP. There were only two. Macau with an economy based largely on gaming and Brunei with a Sharia legal system. At 1% debt was Equatorial Guinea where the gap between rich and poor would make a Progressive apoplectic.
The country with the greatest debt is Luxembourg. Every Luxembourgian(?) owes $4,028,283. Every American owes our government's creditors $43,758. Ireland's debt to GDP ratio is 1004% and every Irishman owes $515,671. That's a lot of Guiness laddies.
The leprechaun was wrong. Debt is needed to finance economic growth; however, problems arise when debt as a percentage of GDP gets too high. Why isn't Luxembourg or Great Britain rather than Ireland on the hot seat? I should read Rogoff and Reinhart's bestseller This Time Is Different: Eight Centuries of Financial Folly to learn more.
Below is a chart from http://www.usgovernmentspending.com/. The brief pop above 100% in the 1940s stems from WWII. What's the rationale for the rise since 1980? Bubbles?
3 comments:
"Enid, invest in countries with no sovereign debt". Good thought. I currently own shares in the Australia and Singapore ETFs (notice you own Singapore). Did your thought and research drive you to buy/sell any country/countries? Thanks.
The short answer j is no with a caveat I'll get into later tonight. One factor is we're fully invested-- no cash on hand. Another is the sovereign debt to growth relationship is unclear. Wonder what the economists have been doing for the last hundred years as this seems fundamental? Your Australia (which I also like) has a sovereign debt to GDP ratio of 92%. My Singapore, Columbia, and Indonesia are 11%, 21%, and 28%respectively. Low, but I didn't know this when I bought them-- pure chance. There are countries with similar numbers that have abysmal growth. With the expert jury still out on this topic, my only takeaway is to avoid stocks, ETFs, and bonds from countries with eye popping debt to GDP ratios. Much of the Eurozone comes to mind.
Thanks for the response, enid. In addition to Australia, I also own Singapore. Am looking at other countries all the time, and your observation about debt to GDP ratio is a point I will put into my mental calculator when evaluating countries. Good stuff.
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