Old versus Young

"The greatest glory in living lies not in never falling, but in rising every time we fall." - Nelson Mandela

"Age is getting to know all the ways the world turns, so that if you cannot turn the world the way you want,  you can at least get out of the way so that you won't get run over." - Miriam Makeba

I am currently visiting family in South Africa and aside from the great time it has been seeing family and friends it is also very interesting from an economic perspective.  While it is never easy to make comparisons between the United States and an emerging economy the size of South Africa there are some very interesting metrics to look at.

The first is the level of debt.  At 41% of GDP South Africa's debt level is relatively low in comparison to the United States whose debt level is at roughly 100% of GDP.  Still the International Monetary Fund is applying pressure to South Africa to take measures to reign in the debt level   The IMF said that, "in many sub-Saharan African economies, inflation control is vulnerable to food price shocks, given the importance of food in consumption baskets".  This apparently is less of a problem in the United States as food is stripped out of the inflation number but the reality is very different and makes one wonder about the double standards of the IMF; one that applies to a large established economy and one that targets a small emerging economy.  Certainly just as with business there is more risk lending money to a small economy but should the disparity be as large as this?  When you look at Japan with a debt level of more than 200% you begin to wonder where the ceiling is for a large economy but as I have repeatedly written it can only be sustained as long as there is the perception the developed nation will be able to handle the debt.

Interest rates are also at all time lows in South Africa but at 5% they are more than five times higher than in the United States.  A one year Fixed Rate Deposit in South Africa earns 5.75% while a one year CD in the United States earns 0.50%, so the rate here is over 100 times higher.  If interest rates in the United States were to move anywhere close to these rates the entire economy would collapse and a very deep recession would ensue. 

Demographics are also completely different with over 50% of the population in South Africa below the age of 25.  In the United States 28% of the population is over 65 and the median age is 38.  Furthermore the fertility rate has fallen to 1.88 in the United States which means that the population is actually shrinking.  This aging population is placing enormous stress on the United States government retirement programs and in order to fund these the United States will be forced to increase the debt level.  Now while South Africa has a massive advantage of a young workforce the main issue is that a huge number of these people are unskilled and unemployed.  This drain on the South African GDP is being felt and is one of the reasons that the IMF is placing South Africa on a warning regarding its debt levels.

Politics is yet another area of worry for South Africa.  Certainly the United States has political issues and it appears that the policies of the current government are not in line with the desired economic outcome, but at least it has political stability.  South Africa, while political stability appears to be in place on the surface, there is still the threat that one of these days the ANC will scrap the constitution and rule with an iron fist and for this reason investors will always require additional return on their investment.  With a lower level of political uncertainty the United States is perceived as a safer bet hence anther reason it can continue to issue billions of dollars of debt for next to no interest.

So while these are just a few data comparisons it is clear that until the global economy finds its footing the United States will be able to continue to issue debt.  The question still remains as to how much they can issue before it becomes a problem.  If rates were to rise to South African levels the United States debt service would balloon the budget deficit exponentially and that would make the world raise an eyebrow and demand a risk premium from the United States.  While the loss of credibility seems a way off it will behoove you to pay close attention to the inflation rate as once it starts to rise watch out below.