Tuesday, June 29, 2010

Countries Debts Are Ponzi Schemes

The Economist has an excellent article on the use of debt by countries - and citizens - today. The article begins:

MAN is born free but is everywhere in debt.

It lists the total debt of most major countries:

Iceland and Ireland are not shown, debt-to-GDP ratios there reached 1,200% and 700% respectively.

The answer to all problems seemed to be more debt. Depressed? Use your credit
card for a shopping spree “because you’re worth it”. Want to get rich quick?
Work for a private-equity or hedge-fund firm, using borrowed money to enhance
returns. Looking for faster growth for your company? Borrow money and make an acquisition. And if the economy is in recession, let the government go into
deficit to bolster spending.


Rising government debt is a Ponzi scheme that requires an ever-growing population to assume the burden—unless some deus ex machina, such as a technological breakthrough, can boost growth.


If the Western world faces an era of austerity as debts are paid down, how will that affect day-to-day life? Clearly a society built on consumption will have to pay more attention to saving. The idea that using borrowed money to buy assets is the smart road to riches might lose currency, changing attitudes to home ownership as well as to parts of the finance sector such as private equity.

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