The Greek Debt Crisis: Is There a Lesson To Be Learned?

The Greek debt crisis continues to linger on, as a recalcitrant Greek people unwilling to make the belt-tightening sacrifices asked of them, confront a resolute creditor, the European Central Bank, who seems to feel quite strongly that repaying one’s debts isn’t just some quaint notion from another era. Greece’ debt burden has grown to an unsustainable level — 177 percent of its GDP.

A decade ago its debt-to-GDP ratio was 100 percent.  But without a change in its spending habits and a deteriorating GDP, the situation has reached a crisis level. The debt-to-GDP ratio is the ratio between a country’s government debt and its gross domestic product (GDP).  GDP represents the total dollar value of all goods and services produced in a country over a year. A low debt-to-GDP ratio is a general indicator that an economy produces enough goods and services to pay back its debts. Greece, obviously, can’t.

But not every country is alike.  Japan, for example, has a significantly higher debt-to-GDP ratio than Greece, 230 percent, and while its economy may be struggling, 95 percent of its debt is owed to Japanese interests and, having its own currency, it can print money. It’s still a serious situation, but it plays out differently — a more lingering decline.

The poorest countries with the worst economies have virtually no debt and very low debt-to-GDP ratios, but for the wrong reason — they’re simply not creditworthy. And even the strongest countries, like Switzerland, still borrow to finance infrastructure improvements and other long-term investments. Its debt-to-GDP ratio is a manageable 34 percent.  The United States, with a sluggish GDP hovering at about $17.7 trillion and a government debt exceeding $18 trillion, now has a debt-to-GDP ratio of approximately 102 percent, about where Greece was a decade ago. No, we are not Greece.  Like Japan, we can print money, and much of our debt is owed to U.S. governmental agencies like the Social Security Trust Fund (almost $2.8 trillion), the Military Retirement Fund (about $500 billion), and the Federal Reserve ($2.5 trillion). But foreign countries, including most notably China and Japan, own a big chunk of U.S. debt — over 34 percent of it. And as we’ve observed in the Greece situation, some creditors actually expect to be repaid, and they’d prefer not to be paid back in devalued currency.

There isn’t necessarily one “right” debt-to-GDP ratio. What might be “right” for one country under one set of circumstances, may be very wrong under another. But one thing is clear: massive debt puts a huge burden on future economic growth.  It’s just common sense that when you’ve got debt to service and repay before the money generated by your economy can be reinvested in infrastructure and other productive pursuits, future economic growth is jeopardized.

A U.S. debt-to-GDP ratio in excess of 100 percent feels very wrong. We’ve had a ratio that high only once just after World War II. That was understandable. Every able-bodied man had been off fighting, and our productive capacity at home was devoted to the war effort. Afterwards, our economy thrived and the debt shrank in significance. Debt-to-GDP levels dropped and stayed in the 30-50 percent range for the next several decades, never rising above the mid-60 percent range until the Obama Administration. During this administration, the ratio has rapidly risen past 100 percent, as the national debt went from $10 trillion to over $18 trillion. With an expanded budget and underperforming economy, the rise in the debt-to-GDP ratio is likely to continue.

The “Great Recession” of 2008-2009 was a convenient excuse, but seven years later it is no longer a sufficient one. Massive increases in government spending have not spurred economic growth, nor have quantitative easing and historically low federal fund rates. We have been in uncharted waters for far too long. The economy moves in cycles and always has. A sound fiscal policy and solid financial position enables a nation to withstand the downturns. Spending yourself out of an economic downturn may seem like a good idea at the time and ease some pain in the short run, but if it doesn’t work all you’ve done is dig yourself an even deeper hole to climb out of.

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