“Right now, the market thinks that Germany is a better credit risk than the U.S.” Chris Mayer reports. Indeed, if you own U.S. debt today and want to buy insurance against default, you will find that such insurance costs more than it does to insure German debt.
“I think that’s probably an anomaly,” Chris continues, “as I would bet that Germany is a poorer credit risk than the U.S. In any event, there is not much difference between the two. It’s a bit like choosing whether you’d rather flush your money down the toilet or burn it.
“Both countries are in danger territory, at least according to the work of economist Kenneth Rogoff. He looked at debt levels going back hundreds of years. Rogoff found that as a general rule, a country gets into trouble when external debt to GDP exceeds 60%. That means that the debt held by folks outside the country is about 60% or more of the size of the economy. The economy often contracts, and things can get ugly.
“If you look at the countries flashing warning signs right now, you find a meaty list of potential crises.
“So let’s see… any resemblances strike you? These are almost all Western countries. All the biggies are here: the U.S., Canada, Germany, France, the U.K. and Australia. Plus, four of the five so-called PIIGS (Portugal, Ireland, Italy, Greece and Spain) and the usual suspects like Zimbabwe.
“I’ll tell you this: I can’t think of any lists you want to find yourself on with Zimbabwe.”
Agora Financial
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