are we in a debt trap? (1 Viewer)

[olay]

a few q'ns.....


are we in a debt trap?

have we been for a while??

if so, is it THAT bad?????

i'm confuzzled.

 

[santaslayer]

debt trap is bad coz ur borrowing to pay off existing debt= increasing debt levels......
and its like a vicious cycle as well (dog chasing its own tail.......lol)
but is aus in a debt trap?.....i dunno really, i dont think we can be classified to that extent......

 

[Bambul]

I'm not sure who you mean by "we".

Again, a debt trap is when an individual/group/company/economy borrows too much and then cannot service the interest payments on this debt without borrowing more. This extra debt adds more to the interest payments and creates a cycle.

The Australian government is not in a debt trap as it has been reducing/maintaining its debt (depending on who you listen to). However there is an argument that Australia as a whole is in a debt trap. This is because Australia has run a Current Account Deficit for the past 30 years and has had to borrow from overseas in order to finance it. As the debt has increased so has the interest payment.

There are some who say that this is not a huge problem as the level of foreign debt, though increasing, is sustainable as borrowing from overseas helps the economy to grow and this keeps the level of debt/GDP at a relatively constant level. As long as the CAD doesn't balloon to a constantly high amount (like 5+% of GDP) then there shouldn't be too much of a problem.

Does that answer your question?

 

[olay]

i get the cycle thing, but you know i read in bulmer that "international authorities usually view 50% of GDP as their limit for acceptable debt burden." i was like "WHOA thats MASSIVE i was thinking 6% was rather bad." ? explanations?

 

[George W. Bush]

Originally posted by olay
i get the cycle thing, but you know i read in bulmer that "international authorities usually view 50% of GDP as their limit for acceptable debt burden." i was like "WHOA thats MASSIVE i was thinking 6% was rather bad." ? explanations?

6% is widely considered the danger level for current account deficit. They're talking about foreign debt.

 

[olay]

uh oh. i thought foreign debt = what private + public sector owes o.s. = what gets paid in the net incomes account of the CA?

thanks for that, i have an assess tmro and was almost unfortunate enough to conclude with the 50% thing and we're fine cause hey our deficit is only at 3-5% usually. *PHEW*i could have made a jumbo arse out of me. thankyou!!!

 

[AGB]

the net income account is only (in regards to foreign debt) the interest paid on loans...so as australia's foreign debt increases, so too does debt servicing costs (generally speaking), but it is not always the case. e.g. in 2001 when global interest rates were extremely low, australia's debt servicing costs were lowered, despite the fact that foreign debt did not decrease.

 

[mushroom_head]

You know when foreign investors invest in Australia because of high interest rates, what kind of investment is that?