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Sunday, September 25, 2011

Debt to GDP does not matter

Debt to GDP does not matter

For too long we have focused on a simple and simplistic indicator to say that the PIIGS (Portugal, Ireland, Italy, Greece and Spain) and everybody else are doomed. Further, these countries can't grow their GDPs so the logic conclusion is that they will never pay...

My personal Debt to GDP ratio is about 250% and nobody seems to care... My bank does not, neither do I. My mortgage payment is only 20% of my income. I comfortably fulfill my obligations with my current income level.

The tricks are these:

I did not buy my house using my credit card, rather a 30 year fixed rate mortgage.
My house is collateral

I am pretty sure that my case is rather ordinary, so if millions of people can afford leverage 3 times their incomes, why can't a country?

Debt terms are as relevant as debt levels, why don't journalist bring this up?

The real question then is
Can a country pledge collateral?

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