Is Debt Reaching the Danger Point?
WHAT happens when a person borrows too much money and then cannot pay it back? He goes bankrupt. His possessions can be taken away by those to whom he owes the money—his creditors.
When a business cannot pay its debts and goes bankrupt, it usually ceases to exist. Its assets may be sold off by the creditors. And the company’s employees are thrown out of work.
A similar thing can happen to an entire country too. In the Great Depression of the 1930’s, the standard of living of entire countries was reduced drastically. Tens of millions of people were forced into poverty as unemployment skyrocketed.
Could that happen again to entire nations? Has the debt load reached such a danger point?
Perhaps the most dangerous type of debt, one that could affect the largest number of people, is the debt incurred at the government level. If a government goes bankrupt, then many of its people will suffer.
How are the governments of this world doing in regard to debt? The answer is: very badly. They are deeply in debt. And those already large debts are increasing rapidly.
Those debts come about in two ways: (1) those incurred in their transactions with other countries, and (2) those incurred within their own country.
How does a government go into debt with another country? In much the same way that you could go into debt: by spending more money than you make.
For instance, France must import most of its oil. Oil is costly. So France pays a great deal of money to the oil-exporting nations. Also, France buys other products from various countries. Now, in recent times France has purchased more from other nations than it has sold to them. This has resulted in a deficit, a debt to those other countries. To pay that debt, France has to borrow money from other nations or from various banks.
Many other countries are in the same condition. They are spending more money with other lands than they are making. And among the reasons for their growing international debts is, as with France, the purchase of oil. They do not produce enough oil, or any at all, and thus must import it. So the relatively few oil-surplus nations grow wealthy, while most of the other nations go deeper and deeper into debt.
Of course, other factors besides oil are involved in building external debts. Nations also import machinery, finished goods, food, armaments and a wide variety of other products. And when not enough is exported, debt results.
Late in 1976 the New York Times carried an article with this headline: “The Problem of Enormous Buildup of International Debt.” The article stated the following:
“The biggest single worry in financial markets these days is over the enormous buildup of international debt—much of it owed to private commercial banks. There is no way to conceal the danger that some heavy borrowers from abroad may be unable to meet their obligations.”
At the head of the external debt “list” is Britain. It has international debts of about $45 billion, a staggering amount for a nation with limited natural resources. Brazil and Mexico each have over $20 billion in external debts. Finland and Indonesia have nearly $10 billion each. The Soviet Union and its Eastern European allies have about $40 billion altogether.
France has external debts of about $10 billion, and these are growing. A Paris press headline declared: “Flashing Red for the French Economy.” The publication referred to unemployment of more than a million, triple the level of the early 1970’s; to inflation that was in double figures; and to a recent one-month foreign trade deficit of about $1 billion, triple what it was a year ago.
The debt situation in Italy is even worse, about $20 billion. There, the retired head of the Bank of Italy said: “The deficits in Italy have now expanded beyond the capacity of the economy to absorb them.”
Poor Nations in Trouble
Almost all the developing nations are struggling with a mountain of debt, especially those who import oil. Their external debts are about $170 billion now, and are growing swiftly. They owe twice as much as they did just a few years ago.
Business Week stated that the debt of these nations “far exceeds their capacity by any normal standard to repay.” Regarding their plight, Baxter, an economic counseling service, reports: “They have already strained their debt servicing capacity, but must come up with new huge sums this year and every year hereafter. Where is the money going to come from? Their task seems hopeless.”
The degree of their trouble can be seen in this further comment by Baxter: “Money they are presently borrowing is being used, not for desperately needed capital improvements, but to pay off currently maturing debts. The Euro-bankers are playing this game and are continuing to extend loans. But, some day, someone is going to get stuck, and stuck good. It is only a matter of time.”
The world money system is closely tied together. Thus, some economists fear that if only a few countries were to go bankrupt, the entire system could go under.
No Improvement Foreseen
At the end of 1976, outgoing American Secretary of the Treasury William E. Simon told more than a hundred oil-importing nations that they faced another huge deficit for the year 1977. He estimated that it would be an additional $50 billion, on top of the existing huge deficits.
Simon also warned that the situation has changed for the worse since 1973, when the price of oil rose sharply. At that time some of the nations had surplus money and could pay for the higher-priced oil. But few have surpluses today.
Summing up the world economic situation, the New York Times said: “In the business and financial centers of Europe an air of gloom is spreading over prospects for the world economy and its capacity to tackle the mounting problems of debt management, sluggish growth and rising unemployment. The highly publicized difficulties of Britain and Italy have diverted attention from the fact that at least a third of the industrialized countries are in some serious financial trouble. . . . The poor nations of the developing world are in even worse shape, struggling under a mountain of . . . debts.”
Added to all these external debts are the internal debts that governments have. These come about when they spend more than their incomes within their own nations. And often these internal debts are much larger than their external debts.
As many nations go deeper into debt, the question arises: Who will rescue them? One country often looked to for help is the United States. But in what condition are her finances?
[Graph on page 5]
(For fully formatted text, see publication)
Total External Debt, Public and Private
Billions of dollars
Communist Countries of East Europe