Economics

Global Debt is "Sinking" Economy as Populations Age in Rich Countries

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The image above charts the ratio of national debt to GDP in countries around the globe.

As the U.K. Telegraph reports:

The world is sinking under too much debt and an ageing global population means countries' debt piles are in danger of growing out of control, the European chief executive of Goldman Sachs Asset Management has warned.

Andrew Wilson, head of Europe, Middle East and Africa (EMEA), said growing debt piles around the world posed one of the biggest threats to the global economy.

"There is too much debt and this represents a risk to economies. Consequently, there is a clear need to generate growth to work that debt off but, as demographics change, new ways of thinking at a policy level are required to do this," he said.

For all the discussion of rising debt levels over the past several years, austerity, and whether Carmen Reinhart, Kenneth Rogoff, and Vincent Reinhart's observations about debt and economic growth rates are meaningul (short answer is yes), very little has changed in many countries. For all the talk about draconian cuts in spending in the name of bringing government balance sheets into order, very little actual year over year spending cuts have been made anywhere even as taxes have been increased.

Regardless of your view on the correlation between growth rates and total public-sector debt (and the progressive economists at University of Massachusetts who supposedly unmasked decisive flaws in Reinhart, Rogoff, and Reinhart's research came up with exactly the same correlation between debt overhangs and growth rates), carrying a lot of debt gives countries less ability to move and try new things. As Nassim Taleb told Reason in 2013, debt "fragilizes" systems and makes them less resilient. This is easy enough to understand in a personal context: If your debt service is 10 percent, 15 percent or more of your income, you've got that much less money to use elsewhere, especially for long-rage investments that will help build your ability to earn or save more over the long haul.

On top of that, as the Telegraph notes, the population is aging in developed countries, which means that the sort of population-based increases in economic growth are likely harder to come by in the future even as more folks are retiring and living off old-age entitlements that cost more and more.

The combination of the two developments—large and growing debt levels and aging/retiring populations—are a real double whammy that deserve attention and the right type of public-sector austerity.

Here's Taleb talking to Reason. It's a sharp interview that's well worth watching.