Greece Went Too Far, Australia Not Far Enough

Last Updated May 10, 2010 2:02 AM EDT

Greece got into trouble because public debt got out of control, mounting up to almost 120 percent of GDP. Iceland has the same problem. Once you get up to that level, it's virtually impossible for the economy to grow. Fortunately, the rest of the pack in Europe are well below the magic 90 percent threshold.

Back in January on my BTalk podcast I spoke to Carmen Reinhart, Director of the Centre for International Economics at the University of Maryland. Her analysis of a mass of historic data across the globe showed that there's no relationship between government debt and the ability for an economy to grow, provided the debt to GDP ratio does not exceed 90 percent. Beyond that you're just considered too risky an investment and that, of course, holds back growth.

If you subscribe to this theory then the rest of Europe has little to worry about. They all fall well below the Reinhart tipping point. The same can't be said for the US, where a $12.9 trillion debt makes up 91 percent of GDP. Obama needs to slash and burn to get back into the '80s.

Public and Private Debt
In Greece and Iceland most of the country's total debt belonged to the government. Elsewhere, like the UK and the Netherlands, private debt is also high. The average Brit owes almost US$150,000. Not surprising then, that growth in house prices has been slow.

Here in Australia, things look particularly healthy. Comparatively we owe very little at the government and personal level. The question is, can it be too good? For example, could foreign investors be pushing house prices up because on this chart we look like the safest bet?

More to the point, if we want to improve our comparative position in the world economy, shouldn't we be borrowing to invest in infrastructure? The exchange rate has never been better and, if you believe Reinhart, we can borrow another 70 percent of our GDP before we run into trouble.

It's a shame really, because the next general election will almost certainly be fought over who can spend the least.