The Big Economies are Increasing their Debt and Heating up the Competition for Buyers

Posted by PITHOCRATES - January 7th, 2012

Week in Review

Keynesian economists don’t see a problem for governments to run deficits.  They’ll look at the current bond rates, do some calculations and note that the additional interest expense for the government is negligible in the grand scheme of things.  But interest costs are not the only problem governments will have.  They also have to first find someone to buy their debt (see Biggest Economies Face $7.6 Trillion Bond Tab by Keith Jenkins and Anchalee Worrachate posted 1/3/2012 on Bloomberg).

Governments of the world’s leading economies have more than $7.6 trillion of debt maturing this year, with most facing a rise in borrowing costs.

Led by Japan’s $3 trillion and the U.S.’s $2.8 trillion, the amount coming due for the Group of Seven nations and Brazil, Russia, India and China is up from $7.4 trillion at this time last year, according to data compiled by Bloomberg…

Investors may demand higher compensation to lend to countries that struggle to finance increasing debt burdens as the global economy slows, surveys show…

The amount needing to be refinanced rises to more than $8 trillion when interest payments are included. Coming after a year in which Standard & Poor’s cut the U.S.’s rating to AA+ from AAA and put 15 European nations on notice for possible downgrades, the competition to find buyers is heating up.

So even in the Keynesian world there is a limit on deficit financing.  When there is more debt than buyers some debt will go un-purchased.  And to make sure that isn’t your debt you’ll have to entice those few buyers to buy your debt.  By the only way you can.  With higher interest rates.  Which makes your original problem worse.  By increasing your overall debt.

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