Which countries are having an economic crisis? How do you judge so?

Economics Economics Questions
1

I would like to get some help on identifying whether a country is in crisis or not.

1- I usually check the amount of “debt”, compare it to the “total GDP”. If it is high compared to the GDP, I assume that a country is on the verge of collapse.

2- I check the “current balance account”, it it is negative… then I would say that this would eventually lead to more debt. Apparently, this is not how economists evaluate an economy of a certain country,

Please help me out here. According to what i’m reading, all Greece, Spain, Iran and Argentina aren’t doing well at all… but the numbers vary drastically

Debt ratio to GDP Greece: debt is 196% its GDP

Spain: debt is 179% its GDP

Iran: debt is only 2% of its GDP

Argentina: debt is 17 % of its GDP

just take a look at the current account balance, you can also see Argentina and Iran are doing much better than Spain and Greece So are these statistics manipulated by governments? or am i approaching this from the wrong angle?

Greece

Debt - external $583.3 billion (30 June 2011)

GDP (purchasing power parity) $298.1 billion (2011 est.)

Spain

Debt - external $2.57 trillion (30 June 2011)

GDP (purchasing power parity) $1.432 trillion (2011 est.)

Iran

Debt - external

$17.9 billion (31 December 2011 est.)

GDP (purchasing power parity)

$1.003 trillion (2011 est.)

Argentina Debt - external

$136.8 billion (31 December 2011 est.)

GDP (purchasing power parity)

$725.6 billion (2011 est.)

2

You’re asking a complex question. Countries can be in crisis for different reasons.

Japan’s debt to GDP is higher than any country you list. Are they in crisis? No, but they have been tight rope walking for years. High debt to GDP is a danger sign. I think the rate at which the debt is growing relative to GDP is more important that the actual ratio.

Iran simply has a currency crisis. Its oil fields are the oldest and most depleted in the ME and production has been falling for years. If they were allows to sell their oil they would obviously be much better off. There is also a pretty good chance that a couple of foreign countries are engaged in QE for Iran.

Spain, Agrentina, Italy, & Greece are all in crisis or standing on the ledge. France and Argentina are the two I think will be the most fun to watch.

3

Any country on a fiat currency is in “crisis” at least the way the USA main stream media defines it. It is a matter of when actors in the economy or more specifically those dealing in debt instruments begin the wholesale abandonment of their instruments.

Iran is the most curious example for me as their currency is under attack by couterfeiters outside their government while all the other ones are under attack by couterfeiters inside their governments such as the US Dollar and Euro. And to defeat the counterfeiters Iran need only to repeal “Legal Tender” laws and let anybody create their own forms of money. Then as the market develops its own money the outside counterfeiters will never be able do the same damage as they will have to either duplicate many forms of money instead of just one: fiat paper money.

4

And the EU countries like Germany, Norway, China, Japan, etc are actually worse off than their severely indebted brethren as the citizenry in these places is literally having their money stolen from them through counterfeiting/inflation by their own governments. Look at China, those poor people have massive mal-investments the size of entire cities as money created to buy increasingly worthless US Treasury Bills goes pointlessly into real estate and other areas instead of into what Chinese consumers want.

5

Treasuries are NOT becoming increasingly worthless. They have, until recently, made ALL-TIME new highs. The prices of treasury bills, notes, and bonds have been going nowhere but up since 1980. That does not mean they’ll continue to do so in the future, but at the moment investors aren’t dumping them.

6

So you want US Treasuries in your portfolio? The US Government admits to a 2 to 3 percent inflation rate. That is greater than the 10 year bond. So no uncoerced or unsubsidized buyer would logically purchase one of these bonds. Besides, the prices of Treasury Securities is just being artificially kept up by several central banks the most involved being the US Federal Reserve. Eventually these foreign central banks will abandon Treasury purchases and eventually the USA will have either a currency crisis or abandon their purchase as well.

7

Winder, thanks for the answer, you said

“I think the rate at which the debt is growing relative to GDP is more important that the actual ratio”

so basically what you are saying what matters is the budget deficit as a percentage of the GDP?

also another question, what happens if they high debt comes to a point where it should be paid, The government would pay it with another loan?

Thanks

8

So a fiat currency is any currency not backed up by an equal amount of gold / foriegn funds, having no fixed value?

how do I know if a country is using a fiat currency or not? I have to admit this is pretty complex.

Iran is the most curious example for me as their currency is under attack by couterfeiters outside their government while all the other ones are under attack by couterfeiters inside their governments such as the US Dollar and Euro. And to defeat the counterfeiters Iran need only to repeal “Legal Tender” laws and let anybody create their own forms of money.

Could you say this in a simpler way please?

Thanks

9

Incorrect. He’s talking about total external debt. That of Japan is not even 50% of GDP. The Japanese government is profligate but the people themselves are savers.

10

not sure if anyone else have said it, but ALL COUNTRIES.

It also depends on what you are defining as an economic crisis. Do you think the US is in an economic crisis? If we agree right this very second that the US is stable enough for tomorrow then is it a crisis that in 20 years everything can come down?

I dont think the US will last 30 years without the whole system coming down or insane reduction in the government with a complete default on debt.

im just going to stop VOLUMES of books can be written on this subject haha.

11

Yes. I think the rate of acceleration of debt relative to GDP is more important. A single year spike is not going to push the economy off the cliff. Japan has had over 200% debt to GDP for over a decade, and it has taken the worse recession in almost 100 years to really push them to the brink. That is not to say Japan has been healthy all this time. They have been hurting for 20 years.

The FED sets the rates that the government borrows at. Right now would be the perfect time to refinance a few trillion dollars because the interest rate is basically negative. BUT, that would screw the social security trust. Social Security is nothing more than a way to force citizens to buy government debt (T-bills) at a lower return than you would get if you bought them privately. The interest paid on the debt is also the interest earned on treasuries, which is all social security is.

12

The Japanese government has. The people do not hold a lot of debt at all.

13

You don’t buy 10 year notes with the intent of holding them to maturation. You buy them in hopes of selling them to the Fed on the secondary market.

14

Umm. Who is “you”? Can I sell my 10 years to the FED?

15

It is to my understanding there is a very liquid secondary market for treasuries, so I would assume so. I would guess it goes through some brokerage firm first. I’ve never done it myself, so I could be wrong.

16

Maybe the signs of a country already in or about to have a crisis are:

  1. How fast the money supply is increasing. The quicker that is happening, the more dangerous. Austrian Economics says it means a business cycle, a boom followed by a recession, is inevitable.

  2. Percent of GDP that the govt eats up. I don’t know a number, but if it’s too high, that means the country’s resources are being wasted.

  3. High chronic unemployment. This, too, means wasted resources, in this case labor. In addition, since in a free market there is no unemployment, certainly not chronic, it means there is a lot of govt meddling, asymptom of parasitism and wasted resoutces other than just labor. Of course, the social damage, crime and so forth, is also heightened.

  4. Living beyond its means, meaning consuming more than it is producing and/or gobbling up its acquired capital base, like farme reating the chickens that lay him eggs. One possible indication of this is a chronic high trade deficit, with the imported stuff being primarily consumer goods, as opposed to raw materials used to increase production.

  5. High number of parasitic jobs. This is a hidden form of problem three. In addition it means money is being given to parasites who merely consume, a not so hidden form of problem four. Parasitic jobs include all govt jobs, and all jobs that the employer is coerced into providing or overpaying for, such as all union jobs. A job can be partially parasitic, if the employee produces to some extent, but is over paid either in wage or in benefits.

  6. Govt intervention [in any form] in big chunks of the economy, such as housing, retirement funds, education, healthcare, protection of the environment, hiring and firing practices. Whatever the govt touches is sure to involve massive amounts of wastage of resources. The more areas and the larger the scope of govt involvement, the quicker the country is heading for its doom.

17

Could you clarify what you mean by “economic collapse”. If you mean government default and the corresponding difficulties, then you’re onto something, although there’s still a degree of oversimplification going on in your analysis, but there are many more types of “economic collapse” than simply government default. If you are looking for the latter then there’s a lot more to look at than simply debt to GDP or even related data.

18

So you want US Treasuries in your portfolio?

Did I mention anything in my post that said I wanted Treasuries? I said that Treasury prices were making all time record highs. If you want a bargain, you have to buy at the bottom, not at the top. That said, it is wise to invest in short term Treasuries during the event of a financial crisis. They are less likely to be defauted on than practically any other government obligations including longer maturity notes, bonds, and other government obligations (social security, medicare, etc.)

19

Thanks a lot Smiling Dave, this is the kind of answer I was looking for, this is very helpful.

  1. How fast the money supply is increasing. The quicker that is happening, the more dangerous. Austrian Economics says it means a business cycle, a boom followed by a recession, is inevitable.

Is there any way to get some statistics on the increase of money supply? Does the government release such information?

  1. Percent of GDP that the govt eats up. I don’t know a number, but if it’s too high, that means the country’s resources are being wasted.

I find this as a very useful indicator, to put it under the test, I got the government spending percentage as part of the GDP

Argentina: 15.4%

Iran: 11.4%

Spain: 20.28 %

Greece:17.45 %

Still I find it not too obvious to tell that Iran is in crisis, since its spending is only 11 %, not too high compared to the rest of the world

  1. High number of parasitic jobs. This is a hidden form of problem three. In addition it means money is being given to parasites who merely consume, a not so hidden form of problem four. Parasitic jobs include all govt jobs, and all jobs that the employer is coerced into providing or overpaying for, such as all union jobs. A job can be partially parasitic, if the employee produces to some extent, but is over paid either in wage or in benefits.

I guess there is no way to measure the percentage of parasitic jobs, or am i wrong?

Again, thanks a lot Dave, I visited your blog, didn’t have enough time to read much though, but I will certainly visit again later, I have a lot to hearn from you

20

Thank you for your kind words, supermario.

As for finding out the increase in the money supply, the govt stopped publishing that statistic a few years ago, around 2005. You have to look around for people with expertise who use indirect info to make an educated guess. There are such things on the internet, sorry I dont’ remember where.

A rough and incomplete measure of amount of parasitic jobs might be to add up number of govt employees together with say, half the number of union employees. I’m making the very rough and unsupported assumption that with benefits and pensions and so forth, union jobs are paid double what they should be, and govt employees are worthless.

As for Iran, maybe it has other problems then, not huge govt spending.