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September 28, 2010

The Debt of Nations

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The future of public debt: prospects and implications by Cecchetti is Economic Adviser at the Bank for International Settlements (BIS) and Head of its Monetary and Economic Department, Research Associate of the National Bureau of Economic Research, and Research Fellow at the Centre for Economic Policy Research; Mohanty is Head of the Macroeconomic Analysis Unit at the BIS; and Zampolli is Senior Economist at the BIS.

Our examination of the future of public debt leads us to several important conclusions. First, fiscal problems confronting industrial economies are bigger than suggested by official debt figures that show the implications of the financial crisis and recession for fiscal balances. As frightening as it is to consider public debt increasing to more than 100% of GDP, an even greater danger arises from a rapidly ageing population. The related unfunded liabilities are large and growing, and should be a central part of today’s long-term fiscal planning.


These debt projections combine with a recent study that debt over 77% of GDP slows GDP growth. So Japan's 197% debt ratio is reducing GDP growth by almost 2% per year. So once a nations debt is around 277%, there is a 3.4% annual reduction in GDP growth and nation is stuck in economic stagnation combined with other large debt problems.



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