Public Debt and the Ring of Fire

by Amanda Griffin-Johnson Desmond Lachman of the American Enterprise Institute (AEI) had an interesting article recently in AEI’s journal, The American. The article, titled “The Emerging Markets’ Century,” details how emerging economies may have a growing impact in the global market because of their comparatively strong public finances when compared to industrialized counties. He explains, “Whereas public debt levels in...

by Amanda Griffin-Johnson

Desmond Lachman of the American Enterprise Institute (AEI) had an interesting article recently in AEI’s journal, The American. The article, titled “The Emerging Markets’ Century,” details how emerging economies may have a growing impact in the global market because of their comparatively strong public finances when compared to industrialized counties. He explains, “Whereas public debt levels in many major industrialized countries will soon exceed 100 percent of GDP, those in the major emerging market economies generally range between 40 to 50 percent of GDP.” Professor Lachman continues:

Earlier this year, Bill Gross, head of Pacific Investment Management Co., the world’s largest bond fund, published a highly disturbing chart that he labeled “The Ring of Fire.” The chart vividly encapsulated how dramatically compromised the public finances of all too many major industrialized countries have become. It did so by highlighting the toxic combination of high public debt and high budget deficit levels across a wide array of major industrialized countries. The most striking feature of the chart: it underlined that not only were the public finances of Japan, Greece, and Italy all on unsustainable paths, but so too were the public finances of France, Spain, the United Kingdom, and the United States.

Sadly, “The Ring of Fire” chart suggests that lackluster economic growth performance in the industrialized countries is likely in the years ahead, since one has to expect that, over the course of the economic cycle, high budget deficit levels will be associated with higher interest rates as industrialized country governments compete with their private sectors for a limited pool of available financing. One would also expect that high public debt levels will undermine private-sector confidence as both households and companies come to fear the prospect of future distortive taxes to deal with compromised public finances.

You can read the full article at The American’s website.