Debt & delusion: the dangers of debt-to-GDP ratios

Great piece here from US economist Robert Shiller on Project Syndicate which is well worth a read.

Shiller makes some great points about the current global debt crises, namely:

  • you should always pay attention to units of measurement. Get the units wrong and you are totally befuddled.
  • that annualised debt-to-GDP % are perhaps not the most appropriate way to assess a countries debt burden.
  • the fundamental problem that much of the world faces today is that investors are overreacting to debt-to-GDP ratios, fearful of some magic threshold, and demanding fiscal-austerity programs too soon. They are asking governments to cut expenditure while their economies are still vulnerable. Households are running scared, so they cut expenditures as well, and businesses are being dissuaded from borrowing to finance capital expenditures.