There is no need to throw out another rambling dialogue over indebtedness and the sovereign risk that is or is not priced into markets. Regardless, this chart shows an interesting “Venn Diagram” of the groupings of nations as measured by their deficit (as a percent of GDP) plotted against their federal indebtedness. We have discussed in recent posts Japan, and the nearly 200% of GDP tsunamai of debt they have hanging over their heads. But PIMCO intelligently groups Japan and some Western nations into a Ring of Fire.
These include: US, UK, Spain, France, Italy, Ireland, Greece and Japan:
PIMCO: Ring of Fire
The general justification for the fiscal deficits central banks have run were that it was necessary at the time, and that the private sector would eventually replace the government’s money. PIMCO put it this way:
“the global private sector is now expected by some to detox and resume a normal cyclical schedule where animal spirits and the willingness to take risk move front and center.”
That has yet to take shape. We have long felt that what what will turn this recovery into a “sustainable” economic recovery will be if this return of animal spirits ensues. PIMCO says the following:
“But there is a problem. While corporations may be heading in that direction due to steep yield curves and government check writing that have partially repaired their balance sheets, their consumer customers remain fully levered and undercapitalized with little hope of escaping rehab as long as unemployment and underemployment remain at 10-20% levels worldwide.”
PIMCO then goes on to discuss Reinhart / Rogoff who put together a seminal study called “This Time is Different: A Panoramic View of Eight Centuries of Financial Crises”. Link is included below. We saw Carmen Reinhart speak at the Inter American Development Bank presentation in Miami a few years ago. She is a stunning academic, with forceful thoughts and words to be heeded. Her study almost implied that over the long run, no governments pay off their debt! Very interesting read, and though long I strongly suggest you read it.
The important point to remember about the historical analysis of financial crises is that “the starting point is important”. The following table shows the gross level of public and private debt (measured as a percent of GDP). The results are impressive - and scary considering the precarious situation of the US, UK and Japan.
Total Debt as a % of GDP
The next chart shows the total indebtedness (as a group) of advanced (red) versus developing (blue) countries. One can see why the emerging markets escaped from the financial crisis relatively unscathed. Their financial markets performance was another story.
Developed versus Developing
Bill Gross and PIMCO continue to put out their monthly Investment Outlook for free. It is available to the worldwide financial community, giving you rare, FREE, access to one of the preeminent thinkers on investment strategy.
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[...] Great chart by PIMCO: “Ring of Fire” [...]