Tuesday, April 13, 2010

Countries Debts: Why Cutting Deficits is Simply Not Enough

The Bank for International Settlements released a report on the global economies and the level of public debts. The reports raises great relevant questions as to the current path countries have chosen. The problem goes far beyond whether countries will at some point restrain the deficits and finally (or ever) reach the "exit" trategy of their current stimuli.

The issue is far worse and something you do not often see discussed in the context of fighting deficits: an ageing population.

The following chart shows the ratio between old age population versus working age population (defined as those aged 15 to 64).

As an example, we see that in Japan round 2010, old age population is around 35% of the working age population. This figure will increase to 70% by 2050. In the U.S. it is currently around 20%, rising to around 38% by 2050.

This is a major problem. All these "old age" people will not be productive and will actually consume public resources (pensions, health care, etc.). The growth of expenses as percent of GDP are show in this chart:

As an example, for the U.S, the growth is around 8% of GDP. This is huge.

The report provides several scenarios for debt as percentage of GDP, as show in the charts below:

(please click to enlarge)


  • Fiscal problems are bigger than suggested by official debt figures

  • An even greater danger arises from the ageing population; the related unfunded liabilities are large and growing

  • Government revenues will be lower and expenditures will be higher; it is essential to fix the fiscal deficits

  • Sovereign debt is no longer considered low risk as evidenced by recent rise in yields

  • Looming long term fiscal imbalances pose significant risk to monetary stability through: (1) direct debt monetization or (ii) increase inflation

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