When evaluating a company, ratios provide profound insights into a company’s performance, it’s financial stability, and what its future holds. One of the key ratios is that between interest charges and cash flow.
Anyone who has had a mortgage understands the problem. If your mortgage repayments represents a significant proportion of your disposable income, you’re in deep trouble when interest rates rise. It’s the same for companies.
And it’s the same for countries, with some important differences.
Let’s look at America’s position. America’s debt is 148% of GDP at $31.4tn[1]US debt ceiling – what it is and why there is one. The government’s revenue is 32.9% of GDP. At present with rising interest rates, America’s 20 year bond yield is 3.8%[2]Treasury Bonds.
If all the debt were to be funded at that rate, the interest charges would make up 17% of all government expenditure. That’s unsustainable, but it’s a little more complicated than that.
Much of the debt is at historical interest rates, which are lower than the current bond yield, so for the moment the total cost is lower than 3.8%, Moreover, with inflation, the amount paid back in the future is worth less than the amount that is being borrowed now. So while the government says it’s concerned about inflation, that same inflation is digging it out of a hole. The Federal Reserve which is independent of the government has the responsibility for inflation, not the government. But they also understand the debt problem, and what raising interest rates will do to the economy. They are between a rock and a hard place, and it is the government – the President and the representatives in Congress who have created this mess.
In the table below, the USA is in the company of a group of countries that are in dire financial straits. How did it get there?
A government has two primary ways of obtaining funding to pay for its expenditures, taxes and borrowing.
America was founded as a rebellion against King George III’s taxes. The French Revolution was also a reaction to Louis XVI’s taxes. History is littered with rebellion’s and changes of government against taxes that were imposed when social equality was already stretched, as now.
The inflation is making everyone poorer. In effect, it’s working the same as a tax, because it’s making you poorer while creatively managing the government’s debt.
Because they don’t want to get thrown out for raising taxes, governments are borrowing, especially in the USA and the United Kingdom.
Long term borrowing is fine when funding infrastructure or investments that creates economic growth or saves money. These loans are funding the incompetent handling of the pandemic, the interest on existing loans, and the excesses of Afghanistan and Iraq.
It’s not a surprise that Putin felt confident that he could attack Ukraine. While America has the world’s most powerful military, it does not have the financial strength to support another sustained conflict.
America is broke. Without some fiscal responsibility sometime soon, the house of cards will come tumbling down.
Government Debt and Revenue to GDP
| Country | Year | Debt | Revenue | Debt/Revenue |
|---|---|---|---|---|
| Japan | 2021 | 256.0 | 38.1 | 6.7 |
| United States | 2021 | 148.0 | 32.9 | 4.5 |
| Greece | 2022 | 191.5 | 50.2 | 3.8 |
| Italy | 2021 | 172.5 | 48.3 | 3.6 |
| Spain | 2021 | 142.7 | 43.7 | 3.3 |
| Ireland | 2021 | 65.3 | 23.2 | 2.8 |
| Canada | 2022 | 112.8 | 41.4 | 2.7 |
| Portugal | 2022 | 116.6 | 44.4 | 2.6 |
| United Kingdom | 2022 | 103.6 | 41.3 | 2.5 |
| Iceland | 2013 | 106.9 | 44.7 | 2.4 |
| Australia | 2021 | 84.4 | 35.5 | 2.4 |
| Mexico | 2021 | 54.5 | 23.0 | 2.4 |
| Israel | 2021 | 83.2 | 37.2 | 2.2 |
| France | 2022 | 116.9 | 53.4 | 2.2 |
| Hungary | 2021 | 88.6 | 41.2 | 2.2 |
| Belgium | 2022 | 103.8 | 49.7 | 2.1 |
| Colombia | 2019 | 82.9 | 40.7 | 2.0 |
| Austria | 2021 | 101.1 | 50.3 | 2.0 |
| Slovenia | 2021 | 89.9 | 44.9 | 2.0 |
| Brazil | 2019 | 110.0 | 61.0 | 1.8 |
| Germany | 2021 | 77.4 | 47.5 | 1.6 |
| South Korea | 2021 | 59.6 | 37.2 | 1.6 |
| Slovakia | 2022 | 64.2 | 40.2 | 1.6 |
| Chile | 2021 | 42.1 | 26.8 | 1.6 |
| Finland | 2021 | 82.3 | 53.0 | 1.6 |
| Latvia | 2021 | 57.2 | 37.1 | 1.5 |
| Netherlands | 2021 | 66.4 | 44.3 | 1.5 |
| Poland | 2022 | 58.7 | 39.8 | 1.5 |
| Lithuania | 2021 | 50.9 | 36.4 | 1.4 |
| Turkey (Turkiye) | 2020 | 42.9 | 31.2 | 1.4 |
| New Zealand | 2020 | 52.8 | 38.6 | 1.4 |
| Sweden | 2021 | 58.7 | 49.4 | 1.2 |
| Czech Republic | 2021 | 48.4 | 41.4 | 1.2 |
| Switzerland | 2021 | 41.8 | 35.9 | 1.2 |
| Denmark | 2022 | 37.4 | 48.6 | 0.8 |
| Luxembourg | 2021 | 31.0 | 43.6 | 0.7 |
| Norway | 2022 | 42.2 | 65.1 | 0.6 |
| Estonia | 2021 | 24.3 | 39.0 | 0.6 |
| Russia | 2019 | 21.8 | 42.5 | 0.5 |
Source: OECD
The above table shows the latest figures for the members of the OECD. China, the most notable omission is not a member of the OECD. The ranking is according to the ratio of government debt to government revenue – the closer a country is to the top, the worse its financial position.
Read more:
Fitch downgrades US credit rating from AAA to AA+
References