Debt: Is it Really That Bad?

Across Europe it is becoming more and more expensive for countries to borrow money; and this includes Italy, Spain and Portugal (as well as France and the UK to a lesser degree) rather than just the extreme cases of Greece and Ireland. As I’ve addressed in previous posts, government’s receive loans by issuing bonds. These bonds are often considered the safest form of investment but usually yield very little interest to the holder. Therefore, as bonds become harder to sell when countries suffer economic collapse or similarly destroy fiscal trust, states are forced to increase the interest rate to attract buyers which in turn makes paying off debt even harder.

In today’s economic crisis, stocks and funds obviously seem scary to the average investor with little tolerance for risk on savings. So people turn towards select investment in safe commodities (such as shares in Wal-Mart), gold and in government bonds. Hence, in times like those we face now, people around the world turn towards treasury bonds, particularly towards those of the US. Though Europe has illustrated some of the worst disasters of this economic recession such as Spain’s 20% unemployment and Ireland’s impractical bank bailouts, the fact is that the overall debt as a percentage of economy remains similar between the US and many European states. And yet US bonds hold and have held for decades, some disproportionate value that has drawn government revenue even in the bleakest times. This means that as other countries accrue high interest rates and are forced to dig holes within holes, the US holds fairly “cheap debt”.

Government debt today is often driven by demographics as retirement age individuals draw out of health care and social security. Even in this arena, Europe has and is forecasted to have a higher ratio of older people to younger than the US as a result of their quicker demographic transition.

In the end, no one can say that the Unite State’s almost $14 trillion is even remotely acceptable, but in some ways, we may be better off than others.