Thursday, December 10, 2009

Debt and Economies.

From time to time, we get data, and news, on debt, and how it is affecting country economies, corporations and individuals. Sometimes, with so much going on in terms of the impact of debt on corporations and individuals, the value of looking at debt's impact on country economies may not be obvious. Or perhaps, the impact of news from Dubai made you go "Wha?".

While economists may not always (!) be successful in demonstrating the interconnections between country economies, corporations and individuals, through neatly tied in, accurate and precise models, we still have a sense of how these interconnections affect us.

Say, a country's debt troubles affect the medium to long term rates it offers on government debt. If an industrial sector company, say in the infrastructure sector, has limited financing options, this impacts the internal hurdle rate that the CFO would set for the company's internal projects. This, in turn, would impact a division's ability to innovate and price products to its customers, which, in turn, could impact the sector's ability to service its individual consumers. One of the many possible outcomes- you, as a utilities consumer, end up paying exorbitant electricity charges for power served off an outdated grid that wouldn't let you leverage advances in renewable energy within your home.

You may argue that economies are complex systems, and practically every outcome could be termed an "unintended outcome", but that does not mean we throw the baby out with the bathwater. It pays to "watch" the macroeconomic world around us.

Lets look at the impact of debt with country economies on returns on long term government bonds. Here's an article that should make you think:

This is a quick review of recent perspectives on debt's impact on country economies to provide background on :
1. Deflation:
2. Managing Debt:

1. Sovereign debt and risk:
2. Potential lessons from market reaction:

Speculation about an EU country default:

Are there any other economies you believe that need a closer look? Economies in Asia or LATAM, perhaps? Why? What could be the potential impact?

What do you think?