Hello Mish
As we approach the next debt crisis it's time to ask some questions.
The widespread measurement of the debt problems of a country is DEBT as a percentage of GDP.
Few analysts question this ratio. But this is how I see things.
GDP = Consumption + Investment + Government Spending + Net Exports.
In simpler terms, GDP is the sum of the private sector plus the public sector plus the net trade balance.
However, only the Private Sector pays taxes and that is what enables debt service. In fact, the private sector must service its own debt as well as that of the public sector.
Thus, a better metric to measure debt levels is private sector GDP as reflected in tax income. This tells us the true brutal story of the debt problem.
Using Greece as an example, the real public debt is over 300% of GDP. Given that Greece's private sector is less than 50% of GDP, the brutal reality is that Greece has a debt level which is over 600% of Private Sector GDP.
The Greek state takes in around €65 billions in tax. This is approximately 10% of total debts.
During the previous Greek debt crisis, economists noted that Greek debt was less than 2% of global debt.
The problem is that the rest of the world is not going to service the Greek debt. The Greek taxpayer will service the Greek debt, and for him the bill is insurmountable.
In the US, the US federal tax intake is around $3.7 trillion. Total debt is $21 trillion plus off balance sheet items minus inner governmental debt.
If we start to measure debt against the income of the individuals that will service this debt, we get a more correct picture of the challenges today.
We are fooling ourselves with this Keynesian debt-to-GDP measurement.
Lars
