Hi Daniel,



Let's begin by looking at the cause of the problem.



Which is criminally irresponsible spending by some governments beginning in the mid 20th century. Those accumulated deficits translate into massive debt -- especially as compound interest is added over decades.



The staggering amount of public debt in some nations are mostly interest piled on top of interest, with some amount of that inverted pyramid extant as principal.



An excellent and quick resource here:

http://www.economist.com/content/global_debt_clock



Anyway, it's plain to see that nations which *didn't* spend their taxpayer's money like drunken sailors, running deficit after deficit, don't have a debt crisis/problem and their economies are generally performing well.



(Spain and Portugal are outlier problem economies with low debt, but hit with a massive housing bubble burst that was triggered by the 2008 financial crisis. But you knew that)



So, outliers aside, well managed economies have low debt and have little fear of rising interest rates. Were interest rates to return to historic levels, those economies would still be in fine shape and only minor budget tinkering would be required to stay on track.



Now, that's good governance!



For those economies with high debt-to-GDP ratios (which I interpret to mean D2GDP of 50% or more) any increase in the interest rate could become catastrophic.



(Again, there are outliers. Japan is in no danger of default and has among the largest D2GDP ratios in the world. Even at high interest rates, Japan has ample room to maneuver. Therefore, no crisis there. Therefore, Japan's D2GDP is not irresponsible)



Many other nations (with high public debt) should be red-faced in their shame for locking their taxpayers into a no-win situation, simply because they couldn't balance their national chequebook.



All it takes is basic accounting knowledge, and some fiscal discipline.



1. Don't spend more than you make.

2. Don't let debt-to-GDP pass 50%.

3. Pass balanced budget legislation if you're nation is debt addicted.

4. Pass legislation to pay down public debt to 50% of GDP or less -- and keep it under that.



It's so simple when you *want* to do it!



Besides Japan, Germany should get a free pass on my lecture, as not only was Germany suddenly faced with the trillion dollar costs of German re-unification after the fall of the wall in 1990, it has since been propping up other EU governments who failed to observe the four simple rules above.



And, Germany played a major role during the Cold War and *more than* carried its fair share during those decades.



Let's recap:



Some nations have a gift for running a tight ship. Congratulations to them! No wonder their citizens score them highly on the UN Happiness Index and they look so smart on the Social Progress Index (SPI).



Here is a link on SPI:

https://www.project-syndicate.org/commentary/economic-development-social-progress-index-by-michael-porter-2015-04



You are not the problem!



Other nations are outliers. I count four. They are not the problem, either!



Still others seem intent on sinking their economic ship, in the shortest time possible.



You are the problem.



Here's what to do about the problem economies -- and is a suggestion that can only help the outliers and the well managed economies -- keeping everything relative, without unduly rewarding bad behavior/punishing good behavior.



For nations that qualify (and in order of best managed economies, first, down to the worst managed economies, last) all of their existing public debt should be refinanced into Islamic financed debt in 2020.



To *not* punish well managed economies, let them refinance first (if they choose this option) to reward them/keep them competitive relative to the rest of the world.



The benefits of Islamic finance (Sharia finance model) are many, I can't possibly cover it all here.



But Sharia-compliant financing's *simple interest as opposed to compound interest* can make a huge difference to help economies get to minus 50% debt-to-GDP within (say) 25 years.



For those who qualify!



Yes, Germany, Japan, Spain, Portugal, are outliers, therefore, they should qualify first, right along with the lower-than-50%-debt-to-GDP nations.



Only then, should the higher than 50% debt-to-GDP ratio nations be offered this financing opportunity.



Wouldn't it be great if Greece ran balanced budgets until 2020, and therefore qualified for Sharia-compliant, simple interest and low interest financing of all its existing debt?



It would instantly lower their payments and debt servicing costs. And allow more taxpayer money to be directed towards infrastructure spending (creating jobs/better tax base) and government services for Greek citizens.



See what keeping your finances in order can do for you?



Here is a link about Islamic finance for you:

http://www.investopedia.com/articles/07/islamic_investing.asp



Just for the record, there is an unimaginably huge pool of funding available for lending through Sharia compliant finance. Those funds are not available for non-Sharia compliant use.



My only concern?



In the rush to help Greece and other spendthrift nations to stay afloat, we could bypass those nations which have worked hard to keep their economies sustainable -- thereby *punishing them for doing the right thing* -- which is always the most egregious insult of all.



While the Islamic finance model may appeal to some nations now, just wait until interest rates begin tracking upward again. Then we will see global panic all over again.



Best to get our economies in order now, and get them completely refinanced at 2.5% simple interest (or whatever the latest Sharia compliant rate is) and do away with compound interest as each nation qualifies for it.



As I said at the outset, free spending governments and compound interest are the culprits in our global financial system.



My suggestion is to build a better global public debt finance model that neatly solves those two problems.



1. Islamic finance public debt consolidation for those nations which qualify.

2. Balanced budget legislation.

3. Maximum 50% debt-to-GDP ratio, by legislation.



Thank you Daniel, for your always excellent essays. A pleasure to read.



Cheers, JBS















