The Consequences of Debt

What’s so bad about debt?  In someone’s personal life, they can continue to rack up debt, charging things to their credit card, buying just a little bit too much house, getting the 0% down deal on the flashy car.  If the debt becomes too much to handle, and they can’t make the minimum payments, they can just declare bankruptcy and start over again, right?  What about countries?  The United States, in 2011, has public debt that’s more than 90% of its GDP (debt is $14.21 trillion, GDP is $14.66 trillion).  Congressman Paul Ryan of Wisconsin introduced a budget for FY2012 this week, and he said that the U.S. public debt is projected to increase to 344% of GDP by 2050 (see video below).  It doesn’t seem like the United States really has to worry about debt, though, does it?

If you think that we don’t have to worry about the public debt, think again.

Here are three case studies in the consequences of debt: 

Greece
First, Greece had a debt crisis in 2010.  Greece is considered a high-income economy, and is the 27^th largest economy in the world.  According to an editorial in the Greek newspaper Kathimerini, large public deficits have been a large part of Greece’s social model for decades.  Greece has had large deficits to fund public sector jobs, pensions, and other social benefits (sound familiar to anyone?).  By the end of 2010, their debt was equal to 120% of their GDP.  In April 2010, debt rating agencies downgraded Greece’s bond rating to “junk” status, which means that they didn’t expect Greece to pay their debts.  This caused it to be harder for Greece to borrow money to fund their social programs and public sector jobs.  After much harranging, the Greek parliament passed austerity measures, cutting spending by the government and raising taxes, and several other European countries and the IMF agreed to provide €110 billion to help Greece out of their situation.   The response of the Greek people to their government becoming more responsible?  Rioting in the streets in protest.  I would call them entitled little twerps, but then I’d have to say the same of the people in Wisconsin.

Ireland
Ireland followed suit in racking up debt.  In 2010, their debt was equal to 94.2% of their GDP.  Because of bad leadership in the banking industry and increasing social liabilities, Ireland was the first Eurozone country to enter a recession in 2008.  After massive bank bailouts and high unemployment, Ireland’s debt will likely be 125% of GDP by 2015.

Portugal
Will Portugal be the next nation to collapse under an unwieldy burden of debt?  It’s very possible.  Portugal has been struggling for years under the weight of several problems.  It has an education problem.  Only 23% of the nation’s population finishes high school.  There’s an abysmal dropout rate, and the country is only now beginning to realize their problem.  They’re also spending like U.S. Congressmen over there.  National debt will reach 90% of GDP this year, according to the Wall Street Journal.  This week, Prime Minister José Sócrates tried to talk some sense into his legislature, introducing austerity legislation to get their spending under control, but was rebuffed.  He resigned in protest.  Portugal’s high debt and education woes have contributed to it being one of the poorest countries in Europe. Just today, Portugal’s government asked for a bailout from the Eurozone nations. This is getting out of control.

Do you know what the scary thing is?  Greece buckled under the weight of $532 billion (126% of GDP), Ireland under $2.2 trillion (64% of GDP), and Portugal has debt of $497.8 billion (83% of GDP).  The United States currently has debt of $14 trillion (93% of GDP).  Chew on that.