I read the first-hand accounts of Argentina’s decline from wealth and prosperity to near lawlessness that were linked to here a while back and they stuck with me. How could a prosperous nation with generally well-regarded policies sink so far so fast? Far more importantly, what caused it, could it happen in other places (i.e. here), and what indicators were missed? Luck would have it that I stumbled across the answers to two of those entirely serendipitously. The answer is actually rather simple: debt. The Argentinean economy was in good shape in the 1990s, it had good growth, good employment, and highly regarded economic policies. What it didn’t have was a good understanding of how much debt it was
getting itself into. For various reasons, Argentina failed to turn the money it borrowed from foreigners into solid, growing tax revenues.
This failure caused it to seek out more and more credit and this worried lenders into raising interest rates. Just like the in-debt-up-to-his-eyeballs suburbanite, Argentina was borrowing from Peter to pay Paul and financing its debt with more debt. The figures on this page ( http://www.frbsf.org/publications/economics/letter/2002/el2002-31.html ) illustrate the failure of the Argentine government to curtail its borrowing. What the world witnessed (none more so than its citizens) was bankruptcy on a global scale. Given (and to some extent assuming) the reasons outlined above, I started to think about what parallels this might have to the current US economy. There are several major differences between Argentina and
the US that make even simple comparisons difficult. The first is size. The US economy is quite simply the 800 pound gorilla in the world market, towering over Argentina’s meerkat. The second major distinction is the difference in the balance of incomes in the two countries. The US derives a far greater percentage of its GDP (Gross Domestic Product)
from exports making foreign lending less one-sided. The similarities, however, are not to be ignored. The US has hugely expanded the amount of debt it has taken on ever since World War II (Please ignore the tone of this article, I do not necessarily endorse it, it merely has a good graph: http://www.cedarcomm.com/~stevelm1/usdebt.htm ). Fortunately, these
massive increases in debt have happened alongside equally tremendous growths in GDP. The number to watch for, then, is the percentage of
debt-to-GDP.
Clearly, the US can withstand a higher debt-to-GDP ratio merely due to its huge size and world influence, but determining it for sure would likely lead to a rather severe recession. One of the difficulties here is that there are very few examples in history for what happens when national debts of large, industrialized nations gets out of control. Argentina was a learning experience for the world economy (and hugely more so for the Argentineans), and hopefully the Japanese economy will handle their 90% ratio with less drastic results. I suggest that among the other economic indicators that are bandied about on the talking-head cable news networks, you pay attention to the debt-to-GDP ratio as an indicator of the health and sanity of the U.S. Federal budget. One hopes that talk of an overvalued dollar and a hissing housing bubble will not devolve into a panic, but always remember that a panic is merely a mass of individuals making the obvious choice. – P.H.
Letter Re: Argentina’s Lessons for the U.S. Debt
