A graphic picture of debt relative to GDP for major world economies

World governments have borrowed massive amounts of money to live beyond their means. Above is a graphic showing the world's largest economies, how much debt they borrowed and the interest payment due relative to their GDP. The tab is piling up...

Bloomberg: World’s Biggest Economies Face $7.6 Trillion Bond Tab as Rally Seen Fading 

How the debt eventually piles up?

This is just an ordinary US$ 100 bill

US$ 10,000 can fit snugly into your trouser pockets...

Hmm...US$ 1 million needs a decent sized briefcase...

At US$ 100 million, one needs to stack these notes onto a pallet....

US$ 2 billion dollars...that's 20 pallets loaded onto a truck...

Now let's visualise how major countries debts are piled up compared to the size of national landmarks...

The number of red pallets represent government repayments due in 2012;  yellow equates to the outstanding debt after the 2012 repayments; the trucks represent the 2012 interest payments due on the total debt piles

Hat-tip to Demonocracy.info

India

India is rather poor if you look at individual income but because of its large population, skewed with younger demographics in which more than 50% are under age 25 and 65% under 35 ,  it is a significant economic power-house in the world.

It has racked up a debt of 74% of the economy in 2011, which is more than the 60% debt to economy ratio set by EU for economic stability standard.

China

The debt pile seems rather scary for China but the size of its economy and population is not to be underestimated. The debt only accounts for ~17.5% of the economy.

China has the world's second largest economy, overtaking Japan in 2011, it is still experiencing economic growth and has the biggest foreign exchange reserves in the world at US$ 3,200 billion.

The bigger the foreign exchange reserves, the more power the country has to influence the value of its own currency.

The greater a country's foreign reserves, the better position it is in to defend itself from speculative attacks on the domestic currency.

It is also accumulating gold bullion aggressively in 2011 to diversify its "paper" reserves.

Japan

Japanese debt stacked around the destroyed Fukushima Nuclear Power Plant. Japan could have built a wall of money to keep Fukushima safe from the Tsunami, with all the money they borrowed.

Fukushima Power Plant compared to the trucks is GIGANTIC.

Japan is a unique example. It holds a MASSIVE 228% debt to economy ratio. This is only possible because of loyalty of Japanese people to the Japanese government. Japan's people are the main buyers of Japanese government debt, and as long as they blindly buy the debt, and interest rates don't go up, they can practically run up the debt indefinitely. The issues start when everyone starts wondering how they will get the money back.

While historically having a good export surplus; Japan still has two "lost decades", where it has experienced no economic growth. This is mainly due to the large amounts of debt.

United States

USA is the nation with most debt by far in the history of human civilization.

USA's total debt, including personal debt, real estate (mortgage) debt, consumer debt, credit card debt and government debt totals a mega US$ 47,992bn, roughly 2,400 trucks full of money. That's the huge wall at the back in the graphic. Source: US Debt Clock

USA borrowed US$ 1,229 billion in 2011 - roughly 2.5x towers of cash in the background. USA runs a mega ~35% budget deficit, far above the 3% max limit set by EU for economic stability standard.

With industrialized world economies in crisis, USA faces little problem to finance its budget deficit in 2012 since world's money is currently flowing into USA in great numbers as investors try to find "safety" where to store their money, since Europe is not safe; neither are banks.

As long as USA has access to cheap credit due to scared investors willing to hand over their money in name of "safety", USA's interest payments will remain far below normal. Much depends on it retaining its AA+ credit rating and the US dollar's status as a world reserve currency.

Canada

Canada has a US$1,577 billion economy, while carrying a relatively insignificant trade deficit of US$ 9 billion.

In 2012 Canada must re-pay and/or re-finance a significant portion of its debt. It must refinance 42% of its debt, but since the country carries as AAA credit rating as of Jan. 2012 it faces little challenge to re-finance its debt.

Brazil

Brazil has in recent years become an Economic power-house and is now included in the G7 (Group of 7) nations meetings.

The economy is rated at US$ 2,517 billion.

With a 4.7% unemployment in 2011 and an export surplus it it is doing rather well.

United Kingdom

The UK has a large economy of US$2,480 billion but now holds debt in the size of ~75% of economy, which is more than the 60% max debt to economy ratio set by EU for economic stability standard.

As of Jan 2012, UK holds a AAA credit rating but has a staggering Gross External Debt of US$8,981 billion(not shown).

The private sector of UK (people, business', etc) are highly indebted, only surpassed by USA. High debt slows economic growth and it is reflected in the slow 0.9% growth of economy in 2011, which is much lower than the 4.2% inflation - meaning people of UK are becoming more poor as of 2011/2012.

France

The French are among the countries attacking PIIGS countries for their bad economic behavior, but are increasingly finding themselves in the same economic situation.

Their credit rating was downgraded from AAA to AA+ recently and hold a 83.5% (2011) debt to economy ratio, above the 60% set by EU for economic stability standard.

French banks are also among the financially weak banks that pose a danger to the French economy.

 Italy

Italy's economy is considered weak and too indebted for safe financial operation. Even its key commercial banks, including Unicredit, are a total mess.

It has a debt ratio of 118.1% (2010) to economy, far above the 60% limit set by EU for stability. Italy faces a GIANT re-payment / re-finance of US$ 428 billion of its debt in 2012, with strong fear that it will have problems finding lenders/investors that want to lend the weak country money.

Credit rating agencies say the outlook for Italy is negative, which means their credit rating will be down-graded in the future, as the debt takes serious toll on the economy and try struggle to pay back their debt.

This will further scare lenders / investors away and force the interest rates up - amount of trucks full of cash of tax-payer money sent to investors / banks / lenders.

Germany

Germany is considered the flag-ship of European economies.

Germany holds a ~80% debt ratio to economy, above the 60% limit standard set by EU for stability, while being mad at Greece and PIIGS for doing the same.

Germany faces a US$ 285 billion repayment/refinance of debt in 2012 but sees no problem of finding lenders, since Germany's economy looks great compared to the rest of the industrialized world.

Russia

The motherland is doing great...

Russia compared to its large economy holds barely any government debt - only 2.5% of economy (GDP).

Russia's Government benefits from large export surplus to pay for government's expenses.

The export surplus comes mainly from exporting natural resources, including natural gas and oil.

China Ningxia wines tops French Bordeaux in Beijing wine challenge...

In a blind winetasting competition in Beijing on December 14, five wines from Bordeaux and five wines from Ningxia - all priced in the range 200 - 500 yuan (RMB) - were wrapped in black cloth, tagged with a number, and served to ten French and ten Chinese wine judges. When the results were announced: the top four wines were Chinese!

The Ningxia vs Bordeaux Challenge was organised by Jim Boyce with website TasteV, wine club Zun, and Grape Wall contributors.

The wines were opened, tested for quality, bagged and tagged, in the presence of several reporters, under the supervision of Philip Osenton, who works with distributor Globus and is former head sommelier at Ritz London and restaurant manager for the Savoy. He and others, including the media, witnessed computation of the scores.

“Sacrilège,” screamed the headline of the French business daily, La Tribune. But the top French dailies, Le Monde and Le Figaro, seemed to suppress the news, quite understandably. The people have enough to worry about.

OK, French wines have been beaten with some regularity ever since the Judgment of Paris on May 24, 1976, when, to the utter and never fully digested shock of the French wine establishment, a Napa Valley Cabernet Sauvignon and a Chardonnay beat their Bordeaux counterparts - and put California on the international wine map.

The judges were asked to rank the wines from first to tenth based on quality. First place was worth one point, second place worth two points, and so on. The wines with the lowest total scores were the winners. The judges had spent 40 minutes tasting and ranking the wines and another 30 minutes discussing them.

The top five:

1. Grace Vineyard Chairman’s Reserve 2009                  34 points  (RMB 488)

2. Silver Heights The Summit 2009                                  42 points  (RMB 416)

3. Helan Qing Xue Jia Bei Lan Cabernet Dry Red 2009       44 points (was RMB220, now pending)

4. Grace Vineyard Deep Blue 2009                                  46 points  (RMB 288)

5. Barons de Rothschild Collection Saga Medoc 2009          54 points  (RMB 350)

The Chinese judges:

• Ma Huiqin, professor at China University of Agriculture and wine marketing expert (head judge)
• Frankie Zhao, owner of Pro-Wine Consultancy
• Fiona Sun, senior editor at China edition of Revue du Vin
• Jin Yang, wine teacher who spent five years studying in Bordeaux wine programs
• John Gai, of wine distributor and bar operation Palatte

The French judges:

• Nicolas Carre, sommelier and wine consultant (head judge)
• Jerome Sabate, long involved as wine maker with Dragon Seal in Beijing
• Nathalie Sibillet, oenologist, journalist and teacher
• Thomas Briollet, seven years experience in China wine distribution
• Edouard Kressman, wine maker with experience in Bordeaux, California and Argentina

Of course, wine competitions can be criticized. The French wines were handicapped by an import tax of 48% (another detail of why China has a huge trade surplus with the rest of the world). But then, Chinese wines got hit with consumption and value-added taxes that reduced the gap to 20%, according to Boyce. And the most expensive Bordeaux retailed for RMB 350 while the winning Ningxia retailed for RMB 488. Quite a price difference.

For now, the big takeaway is that Chinese wines have again - not for the first time, shown they can compete on a global level. The reality check: these wines represent a smidgeon of the China market and the industry as a whole still has a long way to go.

But who could have imagined a few years ago spending US$77 on a bottle of good Chinese wine to be shared over a romantic dinner? The French must have had similar thoughts about California wines in the aftermath of May 24, 1976.

More upheaval in the old world order...

China's 2011 holdings US Treasuries debt cut again in October

China trimmed its holdings of US Treasury debt by US$ 14.2 billion in October, driving its holdings to the lowest level this year.

This move to cut the US debt holdings indicated an attempt by the People's Bank of China (PBOC) to increase its cash holdings of dollars in order to shore up the value of the yuan.

The yuan has been faced with increasing downward pressure as investors sold the currency seeking a safe haven in the US dollar amid a grim outlook for the global economy.


China held a total of US$ 1,134 billion of US Treasury debt as of October 2011. According to the US Treasury Department, China accounted for approximately 24% of total foreign holdings of US debt. Despite this latest cut, China remains the largest foreign holder of US treasuries.

Analysts advocate China should continue to accelerate the diversification of its US$ 3.2 trillion foreign-exchange reserves, amid growing global financial uncertainty. Currently, about one-third of China's foreign-exchange reserves is invested in US Treasury bonds.

The PBOC has been reported it's planning to create a fund worth US$ 300 billion to invest the country's foreign-exchange reserves in the US and European markets. The fund will reportedly seek to invest in real assets and company shares, rather than government securities.

Gao Xiqing, vice-chairman of China Investment Corp, the country's sovereign wealth fund, said recently that the fund is actively looking for investment opportunities in infrastructure projects in countries including Britain, the US, and Brazil.

2011 China grain harvest rises for the eighth consecutive year

The China National Bureau of Statistics office released in a statement on Friday the country achieved another bumper agricultural harvest this year, the eighth consecutive year of growth for grain output and a record for food production.

Agricultural experts said the bumper harvest will help ease the country's food price hikes, facilitating the government's efforts to combat the stubbornly high inflation rate (official October CPI was +5.5% ). However, China's robust demand means the increased grain production is unlikely to check the country's growing imports, particularly for corn.

Bumper yields this year saw food output rising to a record 571 million tons, registering a 4.5 percent increase year-on-year. The production volume has already reached the government's grain output target for 2020, the bureau said.

Major Crops    Tonnes (millions)    Annual increase
Rice                          200                        + 2.6%
Wheat                       118                        + 2.4%
Corn                          192                        + 8.2%
Sub-total                   510
Others                         61
Total                          571                        + 4.5%

As China's urbanization process deepened, Chinese families consumed more meat in their daily diet, generating extra demand for corn as animal feed.

Meanwhile, industrial demand for starch and ethanol also increased, imposing upward pressure on corn imports. During the first nine months of this year, China imported 645,000 tons of corn according to data from grain.gov.cn, a website operated by the China National Grain and Oils Information Center.

In July, China ordered 533,000 tons of corn for delivery after August from the United States, according to the US Department of Agriculture, exceeding US estimates for Chinese's corn imports for the whole year.

A brief history of worldwide house price trends 1970 - 2008

Double click on image to enlarge view 

The striking aspect is the two boom cycles experienced by the United Kingdom and Netherlands in both the late 1980's and post 2001. Japan collapsed after 1991 and never recovered.

The 2000s was characterised by an era of cheap credit fueled by the Greenspan-led United States Federal Reserve which rippled worldwide that drew in Ireland, Spain and Australia. It's surreal and one wonders, within this context, the extent to which Fannie Mae and Freddie Mac were responsible for the 2008 US subprime housing bust.

The stand-out is Germany whose real house prices remained startling flat throughout most of this period...only to fall from the mid-2000s...reflecting a culture of renters and / or financial probity.

Alas, the historic data on mainland China is near impossible to obtain. The country didn't really open up fully for private enterprise until 1992. I'm sure the size of the current property bubble there will render its growth performance vis-à-vis 1970, to be off the charts.

China's WEF warning on its US Treasury sovereign debt holdings...orderly liquidation...

China has explicitly warned the debt markets...

A key rate setter for China's central bank let slip, or was it a slip, that Beijing aims to run down its portfolio of United States debt as soon as safely practicable.

"The incremental parts of our of our foreign reserve holdings should be invested in physical assets," said Li Daokui at the World Economic Forum in the very rainy city of Dalian, formerly Port Arthur from Russian colonial days. Mr Li, one of three outside academics on China's Monetary Policy Committee, described the debt deals on Capitol Hill as "just trying to by time", saying it will not be enough to stop America's "debt dynamic" turning dangerous.

"We would like to buy stakes in Boeing, Intel, and Apple, and maybe we should invest in these types of companies in a proactive way."

"Once the US Treasury market stabilizes we can liquidate more of our holdings of Treasuries," he said.

It appears this is the first time a top adviser to China's central bank has uttered the word "liquidate". Until now the policy has been to diversify slowly by investing the fresh US$200bn, on average, accumulated each quarter into other currencies and assets, mainly AAA euro debt from Germany, France and the hard core.

It is not clear how much US debt is held by SAFE (State Administration of Foreign Exchange), the Chinese central bank's forex arm. The figure is thought to be over US$2.2 trillion. What's clear is a large vexed seller is agog to let go.

The relevant ETF (NYSE: TBT) to capture this directional move, as confidence in US Treasuries slowly erodes, is the ProShares UltraShort 20+ Year Treasury; it seeks daily investment results that correspond to twice (200%) the inverse (opposite) of the daily performance of the Barclays Capital 20+ Year U.S. Treasury Bond Index (the Index).

The 1st China-US Governors Forum paves the way for closer bilateral trade and economic ties in Sino-Chinese relations...

The first ever China-US Governors Forum opened at Salt Lake City on 14th July. Its purpose is to provide a new platform in promoting cooperation between the two sides in areas of trade, investment, energy, environment and people to people exchanges.

With the full backing of both Presidents Hu and Obama, it is jointly organized by the Chinese People's Association for Friendship with Foreign Countries (CPAFFC) and the National Governors Association (NGA) of the United States. This venture was instigated by President Hu in his January visit to the United States to enhance cooperation at the local level between the two countries.

The Chinese delegation led by the Zhejiang provincial Communist party secretary Zhao Hongzhu plus leaders from a number of Chinese provincial leaders including from Anhui, Qinghai, Yunnan and Zhejiang and over 30 US governors attended the forum. CPAFFC and NGA signed a Memorandum of Understanding, pledging to make the forum a long-term fixture.

In 2010, China exports to the United States totalled US$364 billion. This compared with US exports to China of US$91 billion. Last year, exports from 24 states to China exceeded US$ 1 billion. Over the past decade, 47 US states' exports to China have grown over 100 percent.

The conference attracted a few hundred researchers and entrepreneurs from local universities, businesses and other institutions in China and the US, as they explore opportunities for new joint projects to promote trade and business, education, cultural exchanges and tourism.

According to the China Daily, this was not just a talk-fest...20 deals were inked including:
- Starbucks and Aini Group in Yunnan (one of the province's most established coffee operators and agricultural companies) signed an agreement to create a coffee business partnership between their two companies, to purchase and export high-quality arabica Yunnan coffee beans, as well as operate dry mills in Yunnan province.
- The Wuhu Economic and Technological Development Zone in East China's Anhui province reached a deal with NuvoSun on a project for thin film solar cells.
- The first China-Midwest (Shanghai -St. Louis) cargo air route operated by China Eastern poised to be a key trade hub will take flight in September creating 12–15,000jobs in St Louis, Missouri. This is subject to one final piece of legislation to be passed by Missouri state senators in September.

This is one dimension that has the highest potential to both promote improving economic relations and bolster closer social ties between the two countries. It dovetails with the signature state visits and summits held by both countries recently in 2009 and 2011…..where the almost obligatory mega-deals are penned eg Boeing planes, Caterpillar mining and construction equipment.

Casting aside any political rivalries and military tensions between the world's top two nations by GDP, it’s one small step for bilateral trade and a giant stride for Sino-US commerce.

China's new Shanghai to Beijing high-speed rail link opens on 30 June...plane wins on time but does not beat cost, comfort and convenience

Thursday, 30 June 2011, the eve of the 90th anniversary of the 1 July founding of the Chinese Communist Party, was a historic day marking the inauguration of the newly built Shanghai to Beijing high speed rail link (HSR - 国高速铁路).


Work began in April 2008 and it was completed ahead of schedule at a total cost of RMB221 billion (US$28bn). The HSR is expected to have a top speed of 300km per hour along the 1,318km route, punctuated by 22 stations with 23 trains running daily in both directions.

Linking the mainland's economic and political hubs, both cities are both currently plagued by gridlocked city centres due to the recent rapid economic growth in China and the relentless increase of middle class car ownership.

A point to point, time and cost test comparing the new hi-speed rail service with an airliner was carried out by two intrepid South China Morning Post reporters on the day. So, how long would it take to reach the downtown Beijing bureau from their central Shanghai office? Will hi-speed rail drastically cut into the time savings from flying. The results highlighted above are pleasantly surprising.

Unless one is seriously time constrained, it makes sense with some forward planning, to just hop on the express, sit back, kick off your heels, and bask in comfort watching the landscape roll by.

If this exercise is anything to go by, HSR for the 1,318km journey is a serious challenger to flying. If the original plan to run the trains at 350km per hour had forged ahead, this would have killed off the airlines slashing the rail journey to around four hours. However, reasons such as affordable pricing, increasing energy efficiency and potential safety factors put that to rest.

There will be long term benefits which the HSR will bring to the 2nd and 3rd tier cities along the route which includes 22 stations (eg real estate and infrastructure development).

China has the world's longest HSR network with about 8,358 km (5,193 miles) of routes in service as of January 2011 including 2,197 km (1,365 miles) of rail lines with top speeds of 350 km per hour (220 mph). Since the introduction of high-speed rail on April 18, 2007, daily ridership has grown from 237,000 in 2007 and 349,000 in 2008 to 492,000 in 2009 and 796,000 in 2010. This vision was only realised via extensive cooperation and through technology transfer agreements with foreign train makers Siemens, Bombardier and Kawasaki Heavy Industries.

Going forward, Chinese train-makers and rail builders have signed agreements to build HSRs in Turkey, Venezuela and Argentina; bidding on HSR projects in Saudi Arabia, Russia, the United States and Brazil. They are competing directly with the established European and Japanese manufacturers, and sometimes partnering with them.

Back on the train...all that remains is to iron out the glitches from the poor mobile phone reception encountered on this first day. Then the business community could really catch on...

China's devaluation dilemma: where next with the yuan, dollar and the euro?

The yuan is currently pegged to the US dollar in order to keep Chinese goods comparatively cheap in the key North American markets. As long as the US dollar is weak, the Chinese yuan is weak and therefore competitive in European markets. While complaints abound from the US about this "unfair" trade advantage, is it possible China has been blind-sided by the recent euro woes?

The US$-euro exchange rate is also a pillar to global trade. As the euro falls, countries are also under pressure to weaken their currencies. Specifically, China is under pressure to weaken its currency because Europe is the largest consumer of Chinese goods. In order to remain competitive, Chinese companies must reduce their profit margins or hope to make up reduced profits by increases in volume.

To weaken one's currency, one has to sell it and buy another currency. If you're China, would you rather sell the yuan to buy the euro, yen, or U.S. dollar? In this trio, the US dollar is king because it's the least worst scenario being the global reserve currency.

The Chinese government is now confronted with a policy dilemma because it has painted itself into a corner. Which exchange rate should it "manage" for the long term benefit of its export industries? It can either target the US$-yuan or the euro-yuan. It cannot aim for both as it has no influence over the US$-euro rate. As this chapter unfolds, distant images of how another major economic power blew up in the late 1980s with failed exchange rate targetting, from which it has never recovered, loom ever larger: Japan. This lack of control worries Chinese policymakers. This could be one reason why Chinese entrepreneurs have recently voiced their increasing concerns over their own government's US$-yuan policy. There are now bigger and wider issues at stake because entrepreneurs are not willing to invest in a climate of uncertainty.

Every country desires a weaker currency so it can export more goods. However, the only way to weaken one's currency is to sometimes make bad investments. Such economics make sense to a central banker: more exported goods mean more jobs, social cohesion and a higher GDP. So why would you fundamentally weaken your entire nation for one good year of exports? Imagine breaking all the windows in your city so that you will experience a building boom.

If market forces to allow the exchange rate to find their comfort levels are not the answer for China's zest for "control", then an alternative outlet needs to be created to protect the general Chinese investor community from the future vagaries of their export sectors. A safety valve that can stand the test of time. Precious metals are one such avenue.

There is no US consumer recovery...implications for China

Last week's Flow of Funds report from the US Federal Reserve showed that US total credit expansion, or the relative lack of it, continued to disappear down the plughole despite the government's mighty efforts to put the country back on the path to prosperity (see chart below).

The current recovery, based in very large part to manufacturers starting to ramp up their inventories, simply cannot be sustained while credit is disappearing at this debilitating rate.
















The recently released Q4 Flow of Funds data allowed economists to get a full view of the 2009 data. It was ugly. Most shockingly, the household sector shrank its borrowing for the seventh quarter in a row.

Combined with continued rapid balance sheet shrinkage in both the corporate and financial sectors, total domestic debt contracted for the fourth quarter in a row. The government's creation of credit, or stimulus, as big as it has been is barely propping up the whole economy overall.

Now, we might be getting used to such news, but it is always worth remembering that, prior to the global meltdown, even one quarter of total domestic debt shrinkage was enough to stir the government into rapid response mode with quick relief measures.

The omens are not good for China's exporters. 15 months after the height of the financial crisis, the trend is now clear. US consumers who make up 70% of US GDP are just not in the mood to spend. No wonder the Chinese premier is reluctant to let the value of the yuan appreciate significantly. This will put pressure on the exporters to raise their prices to the buyers and could be the final straw that leads to bankruptcy and spills more unemployed factory workers onto the city streets.

With demand conditions probably permanently stuck in a rut, who dares to prick any of the current China bubbles ranging from property to stockmarkets?