Tuesday, September 29, 2009

Comment on Theo Spark,
"Spending your way out of debt
......from Rico"

(The chart is from the OECD)

Why is Israel the outlier? What have they done right? Maybe they are anomalous because of outside transfers due to foreign aid or support from American Jews or capital inflows because of the favorable investment climate. Ireland also got some return for their expenditures. Does this indicate those two choose to pay down debt and ride out the storm, Israel successfully and Ireland less successfully, while everyone else but Italy just tacked on more sail? Other metaphors involving pouring water or gasoline on a fire may be considered.

Is there a natural level, say at 7%, below which a modern economy can recover and above which it is in trouble? If so is everyone to the left of Germany facing a real collapse? Can countries that have wasted less than 5% of GDP, such as Italy Portugal and the Scandinavians, adopt the Israeli-Irish model and get out of the hole?

My choice of the 7% and 5% lines is arbitrary. Other combinations could be selected and tested. At what levels of structural debt can an economy recover and what will happen to those who can not?

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