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Decimal Digest
26 Sep 2011


What ails the world economy?

By now, all of us are fully aware that the world has excessive debt. What is more interesting is that the distribution of debt across the world is exactly the opposite of what our common sense would suggest.

If an individual takes advice from a professional financial planner, the advice is to have relatively higher debt at a relatively younger age, which needs to be paid off by the time one is ready to retire. A typical recommended debt profile over a life cycle would look like something shown in the chart below:

Let us now look at public debt (as a proportion of GDP) and median age profile for the top 50 nations in the world by PPP GDP in 2010.

Clearly, the debt of the world is in the wrong hands. Nations with older populations have higher debt. This is simply unsustainable. Maybe, in order to reduce the cost of debt adjustment, we need to have free labor mobility now, in addition to the free capital mobility that the world enjoys.

It would be interesting to note that the world had completely free labor mobility across borders till the start of the 20th Century. Going back to this laissez faire system would reduce the pain of debt adjustment, as people move to high income, aging and indebted developed nations from younger, lower income but less indebted developing nations.

The question is whether societies will accept such a solution for the common good of the entire global economy, given the tough economic environment.

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