Economy

The U.S. Public Debt

There have been many stories written about the huge public debt of the U.S. Newbie investors in Singapore are sometimes ill-advised by the so-called “more experienced” investors to completely avoid investing in the U.S. for this reason, much to the detriment of the portfolio’s diversification.

To be sure, the public debt of the U.S. is huge in absolute dollars, but we need to take into account the economic capability of the country when evaluating the public debt. For example a $10k-debt is much more inflicting to a person earning $30k a year compared to another person earning $300k a year.

To this end, let’s look at the percentage of a country’s public debt to its gross domestic product. The figure below, which I obtained from Wikipedia, illustrates this.

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The numbers for the top 58 countries are given below.

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The U.S. is ranked 35 on the public debt / gross GDP scale, at 64.7%. Interestingly, Singapore is ranked the 11th most public-debt-versus-gross-GDP nation at 102.9%. And its neighbor Malaysia, has less than half of Singapore’s debt ratio, at 46.2%.

All numbers are estimates for 2005.

Source:

[1] CIA – The World Factbook.
[2] Wikipedia.


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For the American Pessimists

Due to the twin budget deficits and other problems in the U.S., many investors in Singapore seem to write off investing in the U.S, thinking that America is losing its global lead in technology.

The following is an article from Economist.com, titled Venturesome Consumption, “in praise of America’s fearless consumers of new ideas and products”.

For a growing number of economists and policymakers, however, the greatest fear of all—not least because its long-term consequences may be so deep—is that America is losing its global lead in technology. In the battle to invent and innovate, China and India, in particular, with their gazillion-strong cohorts of engineering and science graduates, will soon overwhelm the dullards and liberal arts students churned out by America’s education system.

The most important part of innovation may be the willingness of consumers, whether individuals or firms, to try new products and services, says Mr Bhidé. In his view, it is America’s venturesome consumers that drive the country’s leadership in innovation. Particularly important has been the venturesome consumption of new innovations by American firms. Although America has a lowish overall investment rate compared with other rich countries, it has a very high rate of adoption of information technology (IT). Contrast that with Japan (the original technology bogeyman from the East) where, despite an abundance of inventive scientists and engineers, many firms remain primitive in their use of IT.

One reason why American firms are able to be so venturesome is that they have the managers capable of adapting their organisations to embrace innovation, says Mr Bhidé. Pressure to be venturesome may have come from America’s highly competitive markets. And America’s downstream firms are arguably the world’s leaders in finding ways to encourage consumers to try new things, not least through their enormous marketing arms and by ensuring that there is a lavish supply of credit.

PS. The title of this post is inspired by post 52278 from the Diehards forum.

The yield curve and predicting recessions

Interesting paper by Jonathan Wright that studies the use of the slope of the Treasury yield curve as a leading economic indicator, with inversion of the curve being thought of as a harbinger of a recession. He considers a number of probit models using the yield curve to forecast recessions. The paper concludes that

Consistent with recent work by Ang, Piazzesi, and Wei (2005) on forecasting growth, I have found that there is more information in the shape of the yield curve about the likely odds of a recession than that provided by the term spread alone. Probit models forecasting recessions that use both the level of the federal funds rate and the term spread give better in-sample fit, and better out-of-sample predictive performance, than models with the term spread alone.

Link HERE.

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