The dirty little secret is the world has no money


The money quote here is "The dirty little secret is the world has no money and the emperor has no clothes." While that statement is a bit of an exaggeration the truth is a lot of the money being spent right now is borrowed or printed out of thin air. Much of it has flowed to the big US investment banks which in turn have bid up the stock market. It is my impression that there is now so much corruption and fraud and games being played that it is impossible to make sense of what is going on. People really don’t understand how much debt the industrialized countries of the world have.

If we look at Greece, the current flash point for financial troubles it owes $400 billion dollars and all the economic activity in the whole country adds up to $350 billion.  The government collects about $110 billion a year in taxes.  To put this all in to perspective let me translate what these numbers would mean for a household.

Say Mr and Mrs Greece earned $65000 a year and they spent $85000 this year.  They on track to add another $20000 on top of the  the $236 000 they owe.   In the last year their employer cut their pay by 2%.   That $236 000 isn’t a mortgage borrowed against a house they can sell.  Loaning out that much money to someone who already has a lot debt is risky business so people naturally want a higher interest rate.  Right now the rate on Greek 10 year bonds is well over 10 percent.  If all that money was paid back over 25 years that would be like making a $2100 monthly payment on $5400 of income. 

Greece isn’t the only problem country, if we were to apply the same analogy to other countries it would like this:

  Revenue Expenses Debt
Portugal  65000 76000 124000
Italy 65000 68000 155000
Spain 65000 82000 96000
Ireland 65000 78000 37000
UK 65000 89000 144000
US 65000 108000 370000
Canada 65000 69000 59000

See any other problem countries in this list?  Any glaring problems with debt spending? 

This analogy doesn’t capture the whole story because some countries like Spain have high levels of privately held debt which isn’t counted here.  The numbers here are government revenue and government debt.  It doesn’t take in to account the total revenue of a nation.  If the United States government made $65000 then the entire revenue of the whole country would be $441000.  There is no way the US Government can pay back their debts without raising taxes. 

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