It is argued that a lot of debt becomes too much debt for a country when government debt rises above 90% above national gross domestic product. Two economists, Kenneth Rogoff and Carmen Reinhart argue this in their publication American Economic Review and present us with some interesting facts.
They looked at data which was recorded over the course of 200 years and from 44 countries and concluded that at ratios of debt to GDP up to 90%, there’s not much correlation between government debt and economic growth.
Above 90%, however, median economic growth rates fall by one percentage point and average economic growth rates fall by about four percentage points. That makes the 90% level a kind of make-or-break point for countries that are hoping to grow their way out of debt. If the government debt load climbs above 90% of GDP, economic growth slows so much that growth is no longer a viable solution to reducing that debt. Above the 90% level, governments serious about reducing their debt load have to increasingly rely on “solutions” such as reducing wages and depreciating their currencies, which might over time increase global economic competitiveness enough to give a boost to national economic growth. In the short to medium term, these “solutions” inflict real pain on the citizens of the countries since they reduce standards of living. According to the International Monetary Fund (IMF) The United States finished 2009 with a debt-to-GDP ratio of 85%. On current trend, the United States will finish 2010 at 94% and 2011 at 98%.The United Kingdom was slightly further away from the cutoff when the International Monetary Fund last updated its numbers in October. At that point, current trends saw the country finishing 2009 at a 69% debt ratio and ending 2011 at 89%. The economic and financial condition of the UK has deteriorated since then, however. The most recent figures show the country finishing 2009 at a debt-to-GDP ratio of 72% and breaking the 90% barrier in 2011. The two biggest continental economies are in surprisingly similar shape, according to the IMF’s October calculations. France ended 2009 at a 77% debt-to-GDP ratio, according to the International Monetary Fund, and on current trend, will hit an 87% ratio in 2011. Germany ended 2009 at 79% and will end 2011 at 88%.
