Sunday, May 30, 2010

Euro debt - does the market have a bad case of bipolar disorder?

Level of debt as % of GDP, from today's Observer:
  1. Korea               37
  2. Switzerland       41
  3. Spain                78
  4. Germany           84
  5. UK                   91
  6. Ireland              92
  7. USA                 95
  8. Euro are            98
  9. Portugal            99
  10. France              99
  11. OECD average 100
  12. Italy                  135
  13. Greece              139
  14. Japan                205
 Put like that, why the panic over Greece, and why even more the panic in the UK? There are other factors to be brought in, like current account deficit, and I have tried to set out the salient features here.

Overall though, the current panic over the prospect of a Euro-collapse seems irrational, in the sense that there are no targets or criteria that indicate stability and health. Instead, the ultimate arbiter is market sentiment. Sentiment is another word for emotion. The markets are driven by emotional confidence. Confidence 51%, result happiness. Confidence 49%, result misery. What we need is a  mathematical goal of financial balance for all to work towards, integrating all the relevant factors.

We have had debt for years. It is not good, because it shows a live now, pay later mentality, which is not the Green way. But assessment of debt has swung from manic to depressive in a couple of years. Prior to 2008 you were an idiot to worry about debt. It was just deficit spending. Leverage. That was how the world works, get used to it. Now the coked up market traders seem to have developed the same moral abhorrence to debt that religious fundamentalists hold towards women bishops.

Debt is how new money is created.  The point is, we have to ask to what use that money is put. If someone borrows in order to pay for his coke habit, that is not good. If someone borrows in order to insulate his house, the energy savings will repay his loan, and so that is fine. Borrow to invest. The most salient investment in 2010 is in renewable energy infrastructure.

I find it depressing that we have to point out these facts, which should be, but are not, obvious to economists and politicians.


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