Friday, August 28, 2009
Roubini: “When Governments Reach the Point Where They Are Borrowing to Pay the Interest on Their Borrowing They Are ... Running a Ponzi Scheme"
In a new essay in Forbes, Nouriel Roubini writes:
Net public debt is going to double as a share of GDP between 2008 and 2014. Even using the very optimistic forecasts of the Congressional Budget Office, which anticipate growth of around 4% over the next few years, the net debt burden will rise from 40% of GDP to 80%--that's an increase in the debt stock of about $9 trillion. The interest charge alone on that increased debt will be in the region of $300 billion to $400 billion a year, which in turn may mean more borrowing to pay the interest if primary deficits are not reduced. When governments reach the point where they are borrowing to pay the interest on their borrowing they are coming dangerously close to running a sovereign Ponzi scheme.
Ponzi schemes have a way of ending unhappily...
Roubini also touches on the issue of the credit ratings of sovereign nations:
Independent rating agencies have already downgraded the sovereign risk rating of countries like Greece and Ireland, and it cannot be ruled out that core economies of the OECD, including the U.S., could eventually be downgraded.For background on sovereign credit issues, see this, For background on sovereign risk issues in general, see this.