Debt v age

Debt, debt, glorious debt,
     Nothing quite like it for cooling the blood.
     So follow me, follow, down to the hollow
                                                            And there let us wallow in glorious debt  (apologies to Flanders & Swann)

It seems impossible today, but until the year 2000 most Western countries were reducing their debt burdens.  Thus President Bill Clinton boasted in his 1998 State of the Union address that the US would see its first balanced budget for 30 years, and added “It is projected that we’ll then have a sizable surplus in the years that immediately follow.”

Unfortunately, 17 years later, this surplus has turned into debt.  This is highlighted in the above chart for the G20 nations, which are almost four-fifths of the global economy.

It shows gross government debt per person in US$ on the vertical axis, and median age on the horizontal axis.  The bubble represents the size of the country’s economy relative to the USA.  This means the world can be segmented into 3 major groups, based on Bloomberg, IMF and UN Population Division data:

  • Ageing & in Debt.   Japan is in the worst position with debt of $100k per person, and a median age of 45 years.  But other major Western countries are also burdened with serious levels of debt.  The US has $59k, Canada $45k, France $42k, the UK $39k and Germany $36k
  • Ageing & Solvent.  This is a small group of 4 countries, who have median ages of <35 years and smaller levels of debt per capita.  Australia has $18k, with a median age of 38 years.  But as with Russia ($2k), it is now facing tougher times as the bonus from high commodity prices ends
  • Young & Solvent.   These 6 countries have median ages of <30 years, and very low debt levels.  Brazil has the highest debt at $7k, whilst Saudi’s debt is just $687 per person

The Ageing & in Debt countries have a rocky road ahead, as high debt creates major headwinds for growth.

Essentially borrowing brings forward growth from the future.  But now, the debt has to be repaid.  This would be manageable, if their fertility rates had stayed the same as in the BabyBoom.  But instead these have halved from an average of 2.8 babies/woman in 1950 to just 1.4 babies/woman today.

This is well below the replacement level of 2.1 babies/woman.  It thus creates a further headwind, due to the lack of young people.  These are critical to economic growth as the ages of 25-54 years are people’s high spending years

And, of course, these young people also have to support the retirement costs of the older generation via higher taxes, meaning they have even less to spend themselves.

The Young & Solvent and Ageing & Solvent countries have avoided this problem.  But instead, many have high levels of corporate debt.  To make matters worse, much of this borrowing has been in US$, not their local currency, as this offered much lower interest rates.

This means these companies face massive exchange rate risk, now that the US$ is breaking out of its 30-year downtrend.  A must-read analysis by Jonathan Wheatley in the Financial Times highlights the problem this has created:

A decade ago, the market for EM (Emerging Market) hard currency corporate bonds hardly existed. Today, it is bigger than the US high-yield corporate bond market, an asset class familiar to investors for decades, and more than four times the size of Europe’s high-yield bond market…

The value of such bonds in the market has grown from $107bn then to more than $2tn today.  But with Brazil’s economy imploding, China slowing and dark shadows over markets from Venezuela to Russia and Ukraine, some analysts worry that the party has gone on too long….

The point of QE (Quantitative Easing) is to inflate the real economy” says Mr Oakley at Nomura.  But instead of driving growth it is creating asset bubbles. The danger is that it will drive bubbles until they burst.”