Forgive my ignorance. We were watching the news and Mrs Sted asked me some questions that I could not answer.

1. There seems to be a problem that Italy, for instance, owes 110% of it's national GDP. We owe more than 110% of my gross pay on mortgage etc, and I'm not worried about it.

2. Countries that are problematic can pay up to 6% interest on borrowing instead of the 0.3% that Germany pays (many people pay similar rates on mortgages)

3. Why do countries need to borrow? I understand that we did during the world wars, and I understand that that has been paid back. But to borrow just to keep afloat is surely comparable to me taking out 'payday loans' and we'd be better cutting our coats according to our cloth?

Economics confuse me. Am I being naive to compare them with our personal liabilities?

Germany may borrow at say 0.3% and then lend that to Italy at 6%.
All countries will issue bonds to raise funds which maybe to repay previous debts or to lend to others.

Yes. Fair enough. But why do they need to borrow year in year out in the first place? Seems a bit like robbing Peter to pay Paul.

Ideally they wouldn't but any business needs to borrow to cover short term cash flow problems. A small amount of government borrowing is fine but if they get their forecasts horribly wrong by vastly overestimating tax receipts then they can't just cut expenditure immediately so they borrow. Get it wrong a few times and the borrowing mounts up I guess.

You are an economist I claim my £5.

Very good
A true economist would have said assume rather than guess and then listed all his assumptions, none of which would be applicable in the real world.

2) Germany are a safer bet to pay back the money, so the interest is less. (It is like gambling, but with a much better chance of winning as most people do pay it back.) Germany almost certain to pay it back Greece and Italy a but less certain...

1) Indeed, but Italy didn't buy a house with it, which can be sold if you\they do not pay it off. The etc is also relevant re car loans, and credit card debts - which is what Vince Cable was on about years ago. He was one of the very few (and no Tories that I know of) that went on about the huge UK House Prices and Private Debt..... I don't know if Italy gave the Banks a load of cash, but I assume so. (This doubled the UK Public Debt.)

3) Countries guess what they are going to receive for years to come to the project their spending. The fly in the ointment is the growth of the Economy. The more growth they guess the more they think they will receive (as more people are employed so more Income Tax etc), however less growth is less revenue and more expenditure in terms of Dole, alone. Throw in some capital projects eg Crosslink, new Nuclear weapons etc and that is the debt. Brown and Labour have had some flack recently for getting hospitals to fund developments by borrowing from the Private Sector ie a mortgage on a new wing etc......

One of the things I learnt on my Economics degree was that anyone on TV with "Economist" with their name was lying

A mathematician, an accountant and an economist apply for the same job.

The interviewer calls in the mathematician and asks "What do two plus two equal?" The mathematician replies "Four." The interviewer asks "Four, exactly?" The mathematician looks at the interviewer incredulously and says "Yes, four, exactly."

Then the interviewer calls in the accountant and asks the same question "What do two plus two equal?" The accountant says "On average, four - give or take ten percent, but on average, four."

Then the interviewer calls in the economist and poses the same question "What do two plus two equal?" The economist gets up, locks the door, closes the shade, sits down next to the interviewer and says, "What do you want it to equal"?

So. It's a bit like me presuming that my pay is going to rise through promotion etc over the next five years, borrowing money on the back of that to fund a new house extension (capital project), and then not getting the promotion?

I'd look a bit foolish.

Yes, and why Politicians predicting daft growth when the Economy contracts look a tad daft (Osbourne).

I don't understand this....Have I taken it out of context?

Why have debt? Check out how the US deficit has built up...

The NYT suggests:

New policies:
Bush = $5tr (war = 1.5, tax cuts = 2, bailouts/stimulus = 1, +misc)
Obama = $1.5tr (stimulus)

see:
http://www.nytimes.com/imagepages/2011/07/24/opinion/sunday/24editorial_graph2.html?ref=sunday

and
http://www.nytimes.com/imagepages/2011/07/24/opinion/sunday/24editorial_graph1.html?ref=sunday

This is all from:
http://www.nytimes.com/2011/07/24/opinion/sunday/24sun4.html?_r=1

The white house, not neutral (and recommending the above) also cover it:
http://www.whitehouse.gov/infographics/us-national-debt

The above does not make the $14tr figure - the rest comes from other effects of the downturn I think, like reduced tax revenues (personal and business).

Also the builder would own your extension and you would pay rent to use it.

I don't know how\why Italian debt is so high; but ours doubled with the Bankers Crash (36 to over 60% is close enough for me)

http://www.ukpublicspending.co.uk/downc ... r=c&title=

The Wars are a bit of a wildcard as the UK Govt seems reluctant to publish figures but at approx £300k per bomb on Libya even that will add up.......

Then the builder would buy and sell it 4 times for 70%, 60%, 50% and 40% of it's value making a profit all the way then get the european bank to buy it back for 50%.

Aha but is and isn't the case - the PIIGS used to have to pay 6% (say) to borrow money which made it unattractive for them to do so. Then they joined the EU and by association with some of the sturdier countries they were lent money at rates much closer to the 0.3% you mention above. Rather than spending the cash on new capital projects / infrastructure they effectively went down the pub for a long time / attended disco's.

This left only disco / bar owners in the black - everyone else was skint and couldn't pay back the money they owed. Debt is like any other tradable commodity and people seeing a lot of hungover people wanted out - only no one would buy it off them except at huge discounts. Of course the lending parties were often the Germay's of this world.

They also needed new debt to pay for other things - now everyone has had finger's burned - so rates are back up to the 6% again (and more).

That costs a lot to fund.

Growth cannot meet it in its current form. They need to invest in capital and infrastructure projects. They need to borrow to do that or massively cut public spending.

Personally I think this would be a good time to invade Greece - how would they fund a war. Any one up for it - Sted?

Maybe we could buy a few Greek islands? Some of the resorts are essentially English/British anyway and we are used to Europeans working in our bars and cafes so would it make any difference?

Would keep our tourist money in house and save the tourists changing money into Euros / Drachmas.

The basic principle is that of leverage. In simple terms, you can either use your own equity to invest in something or borrow from someone else. You can increase your return by borrowing and so a level of debt is actually more efficient than having no debt.

If you have £100k equity and can invest in something that provides a 10% return in a year, you can either just invest the equity and make £10k (10% return on capital), or you could use £50k of your equity and borrow the other £50k at 5%. At the end of the year, you get back £110k, repay the £50k plus interest of £2,500 - net profit of £7,500 or 15% return on capital. By using leverage based on fixed rate borrowing, you've increased your return by 5%. If you did the same with your other £50k equity you would have made £15,000 profit instead of £10,000 profit, i.e a 15% return on investments that only paid out at 10%.

In the context of Governments, equity is the amount you can raise by taxes etc. If you also take on debt, you can invest in larger capital projects which generate GDP. The extra wealth created by the investment is greater than it would have been without the debt and so you increase the implicit rate of return on investment (as long as you can borrow at a lower rate than the return on the investment). The wealth created pays for the debt and makes everyone better off, and importantly proportionally better off than if the debt were not used. That's the basic, Keynesian, theory, although obv it's a lot more complex than that.

Problems obviously arise when you get defaulters on the bonds that you issue, as they do in the self fulfilling prophesy of the credit rating agency downgrades making your debt more expensive (you can't borrow at the lower rate any more and the leverage effect reduces or even reverses - the corollary of leverage is that if your borrowing rate increases above the return rate the negative impact is accelerated just as the positive return is accelerated in the example above).

There is also the assumption that you can't just keep on borrowing to fund growth, partly because of diminishing returns on capital investment and partly as the risk increases and the cost of capital increases. A decent rule of thumb might be that if your debt:equity ratio goes over say 60% then the risk profile goes up, cost of capital increases and you don't get the leverage benefits, in fact you can end up borrowing more just to fund repayment of earlier debt (not in itself a problem - bonds are fixed term and continually issued to repay old bonds coming to maturity, the problem arises when you have to issue more and more bonds to cover maturing bonds without generating cash to use for investment - a debt spiral).

Governments are by their nature short sighted and tend to forget about the cyclical nature of economies. In boom times you should be reducing your overall debt - if you keep it at 60% of your rising boom-time GDP, it ends up at a higher% of GDP when you hit a recession and you can end up in a debt cycle. Typically Governments seem not to realise that and end up borrowing and spending in boom times and cutting back in recessions, which is the wrong way round.

That's all very simplistic, but attempts to explain why debt isn't necessarily a bad thing in theory, without really scratching the surface of why is doesn't always work in practice.

oh - ps. When people 'discovered' leverage in the late 20's, it pretty much caused the Wall Street Crash and the great depression.

Theory and practice....

esp when mixed with greed.......

Frightening, isn't it? If the US was to default, I'd suggest we all get supplies and keep ourselve locked indoors for a while....

Obviously, FF can carry on - the Premier League doesn't need a crowd, right?

NATO led so therefore we would only pay a % of costs.