Nothing is more admired from a distance than quietly-maintained financial repression. We in the Anglo-Saxon world look out and envy the high household savings rate which deliver a seemingly endless supply of savings with which to finance sparkling new infrastructure and a manufacturing sector alive with the purr of new machinery. Why can't we be prudent like that?
The answer, of course, is that the corollary of financial repression is almost always an economy in which savings are allocated far more widely by banks or, worse, governments, than by capital markets. And in turn that tends to result in lower returns on capital, and, in time, more debt than in non-financially repressed economies.
We tend to forget this partly because it seems so counter-intuitive – how can all those hard-saving Japanese (or Dutch for that matter) end up carrying more debt that us financially-incontinent Brits and Americans?
But of course, most countries have very little idea about how indebted, in a relative sense, they are. Thus, even in the aftermath of August's financial panic, it is still uncommon to find Europeans who know that Europe is carrying a far heavier debt-load than the US.
So the Bank of International Settlements' work on debt levels is extremely valuable if only because it gives us the comparative data we simply don't yet know instinctively. Rather than simply trot out the usual government debt/GDP numbers, BIS has tallied up all debt of the non-financial sector – that's government, corporate and household debt.
You can find the results here, and they bear illustration. For example, they show that the average European economy is carrying a debt/GDP load 43 percentage points higher than the US.
But that's not Greece. For, out of 18 OECD countries surveyed by the Bank for International Settlements, Greece is the sixth-least indebted of the lot – indeed it's debt/GDP ratio is three quarters of a standard deviation below the average! I'm quite sure that Finland isn't prepared to learn that Greek debt/GDP levels are only three percentage points higher than its own. I doubt that France, the UK, the Netherlands will already know that, all-told, they are more indebted than Greece.
But whilst the individual readings are sometimes eye-opening - the US is the fourth-least indebted of OECD countries (so much for the 'hopeless case' rhetoric), there are other things to notice. First, although capital markets are currently pricing sharply for differences in debt-load, most of the developed world is clustered around 300-350% of GDP. In fact, there's an average debt load of 312% of GDP, with a standard deviation of 54 percentage points.
The world's debt-profile used to be neither so large, nor so clustered. Here's how it looked in 1980: the average debt/GDP was 167%, but with a standard deviation of 50 percentage-points – virtually the same spread as now, but on a much lower base. Then, the potential debt-problem nations were Japan (the perennial winner in this class), Canada, Sweden and the Netherlands. By contrast, we can clearly identify the prudent and financially cautious as . . . . Greece and Italy.
By 1990, Germany had won a reputation for debt-avoidance, but it was still joined at the bottom of the league by Greece and Portugal. Meanwhile, the average had jumped to 210% of GDP, with a standard deviation of 64 percentage points.
At the turn of the century, the average debt/GDP ratio had risen to 255%, with a standard deviation of 55 percentage points.
Is it too facile to attribute the noticeable convergence of debt levels to the globalization of capital markets and/or the convergence of interest rates which occurred in the years prior to the introduction of the Euro? It shouldn't be: after all, the logic of the single currency is that high net-saving countries (such as Germany) get higher bond-yields than their savings/investment balance ought to deliver; whilst countries that are investing far more than their domestic savings-flows could finance discover they have lower bond-yields than they might otherwise legitimately expect. In these circumstances, one should expect a convergence of 'financial thickening'. Unfortunately, the financial logic behind this goes no way at all to undermine the perpetual truth of banking – that no banking system can grow its assets by 30% a year without making dreadful errors.
Anyway, as we watch the Euro Doomsday Machine go about its work of devastation over the coming months, bear these data-sets in mind, because they illustrate some of the truths that are at work in our lives.
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