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I did some research over this weekend:

Total Public debt (includes domestic and foreign) as a % of GDP:
US (74), Canada(62), Japan(170), UK(47), Italy(104), france(64), Germany(63), Spain(39), Iceland (23), Australia(15), Singapore(93), UAE(22), Brazil(41), Chile(4), Mexico(20), Russia(7), India(59), China(15), South Korea(27)


External debt (public + private, owed to foreign nationals) as a % of GDP:
US (93), Canada(53), Japan(33), UK(454), Italy(61), france(210), Germany(155), Spain(79), Iceland (600), Australia(125), Singapore(13), UAE(37), Brazil(12), Chile(24), Mexico(11), Russia(24), India(7), China(5), South Korea(19)

Source of data: CIA factbook

IMO, public debt is one of the measures of govt efficiency and its ability to make large economic changes. External debt is one of the measures of overall financial health of the nation. Having more than 100% is a route to bankruptcy as Iceland recently showed us. UK seems to be headed over there. A much smaller public debt accompanied with a large GDP may provide a counterbalance to external debt. Similarly a low external debt can provide a counterbalance to large public debt.

My conclusions:

1. China, Chile, South Korea, Russia, Brazil, Mexico and UAE are clearly much better placed on either of the metrics. Investment into these nations has a very high potential. Chinese metrics are simply amazing. And so are Chile's although its scale of economy is not large enough to allow it to grow like China.
2. On a relative basis, US is not yet in as bad of a position as it is made out to be. A lot of rich countries are in similar or worse status.
3. Currency traders primarily look at relative GDP growth (higher leads to stronger currency) and domestic interest rates (lower lead to stronger currency). Over long term, the currencies of nations with low external and public debt are likely to emerge stronger as low numbers on these metrics will allow higher GDP growth and lower interest rates. The current low interest rate in highly debted nations is an aberration. These aberrations can last more than decade and create a Japan like situation where public data rose dramatically. Low interest rates allowed it to have a strong currency but I wonder how long can it be sustained. USD is unlikely to fall relative to EUR, pound or yen too much from this point. In fact it could appreciate. It could fall relative to countries listed in point 1. BUT many of those countries tie their currencies to dollar (in varying degrees of strength) to increase their exports and that created a distortion. The recent fall in the currencies of many developing nations is primarily due to an overwhelming hedge against the fall of dollar and not on the basis of economic fundamentals. Any of these distortions are unlikely to survive in their existing form over a long time (10-20 years).

It would be interesting to see how China copes with 20 million unemployed this year due to closure of 70,000 factories. China has been buying depressed international assets such as oil and minerals with its vast dollar reserves. China recently lent $25B to Russian firms for 20 years stakes in oil fields and production. Another $10B to Brazil (Petrobras) for a 15 year supply. No other country is left with such wherewithal today. China has been buying mines in central Asia, Africa and Latin America too. It is getting rid of the US dollar which it fears could devalue and buying good assets at low prices. A three birds (getting rid of dollar, buying valuable assets and buying them a below market value) with one stone scenario.

Anurag
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anurag

i like this line of research. however, as you point out, it is extremely difficult to tell where currencies will move and when, with when being the more uncertain.

also, low domestic interest rates lead to weaker currency as there is little reason for people to hold the currency. japan's negative interest rates over the past several years were what led to the massive carry trade which has recently unwound causing the crippling rise in the yen.

also, against all fundamental rationale, the dollar has been boosted by the fear griping the market (flight to safety...although the level of safety can and is being questioned by some). there is really no telling when this will reverse.

also, i wouldn't be so confident about emerging market currencies appreciating against the dollar any time soon. many of these companies rely on exports, so a weaker currency is beneficial. they are going to whatever they can to maintain that advantage.
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Thanks Snake!

Yup, I made a mistake in stating the low interest rate leads to stronger currency when it is the opposite. Low interest rates cheapens the value of money and leads to weaker currency. However, current times are aberrant as although the interest rates are low, liquidity is missing. In the absence of liquidity, currency cannot weaken with low interest rates, I think.

Anurag
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That is very useful information Anurag thanks for posting that. I have been doing some research into where to park some cash to hedge against a possible future collapse of the dollar. I've recently been investigating the Norway Krone, one of the factors that drew me to the Krone is that Norway are a Net external creditor, i.e. their net assets exceed their total debt. The CIA yearbook figure for them is somewhat confusing as it is including the bills/bonds Norway used for liquidity, as mentioned here:

http://episteme.arstechnica.com/eve/forums/a/tpc/f/28609695/...

and this site provides more information:

http://www.norges-bank.no/templates/article____12330.aspx

The Krone is on my candidate list of currencies to diversify into, as I suspect the current financial situation in the US is going to get much worse before it gets better. On the positive side, if the stock market declines further it may open up potential buying opportunities for some stocks that have become rather expensive recently such as MR and EDU.

N.
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