|
|
Macky
|
 |
Really getting into it |
Location: USA
Registered: November 2008
Messages: 973
|
|
|
Weimar Republic anyone?
http://www.ft.com/cms/s/0/8f4a305c-7f8a-11de-85dc-00144feabdc0.html
How debt could turn into a runaway ghoul
By Tim Congdon
Published: August 2 2009 18:40 | Last updated: August 2 2009 18:40
Scare stories about British public debt are not new. Contemporaries fretted about the unsustainability of the national debt in the 18th century, long before the era of credit rating agencies and sovereign debt downgrades. Yet somehow bondholders have been paid interest, and government debt has been redeemed and renewed, without interruption since the Stop of the Exchequer in 1672.
The last two periods of intense anxiety about Britain’s public debt were in the mid-1970s (which culminated in a visit from the International Monetary Fund in late 1976) and the early 1990s (met by large tax increases in 1993 and 1994, and several years of expenditure restraint). They saw budget deficits in the 7-11 per cent band of gross domestic product, with the precise number depending partly on the definition adopted.
The deficits were bad enough, but they were markedly lower than the 12 per cent of GDP expected for public sector net borrowing in 2009-10. From April to June this year, public sector net borrowing was £41.2bn ($67.8bn, €48.2bn), exceeding in just three months the total in any full year before 2008-09.
As at present, analysts worried in both the mid-1970s and the early 1990s about a potential slide into insolvency. A large deficit would add to debt in year one, which would increase debt interest, which would increase expenditure and expand the budget deficit in year two, which would cause faster growth in the debt and debt interest, and so on. In some analyses interest payments became a Frankenstein’s monster, taking on a life of their own and overwhelming attempts at debt control.
A framework for thinking about debt sustainability emerged. The budget deficit was split into two elements, debt interest and the so-called “primary balance” (the excess of non-interest expenditure over tax receipts). A simple algebraic argument showed that – if the primary balance were nil – debt would grow faster than GDP when the real interest rate was higher than the trend rate of output growth. Alternatively, if the real interest rate were equal to the trend growth rate, a continuing primary deficit would also cause debt to grow faster than GDP. (Of course, a nation both running a primary deficit and paying a high real interest rate on its debt would see its public finances deteriorating with particular rapidity.)
How do the UK’s public finances fare at present, relative to these concepts and the past? The National Institute of Economic and Social Research has estimated that the cost of servicing the national debt will be £25.6bn in the current fiscal year, about 2 per cent of GDP. By implication, the primary deficit is roughly 9-10 per cent of GDP, which far exceeds the previous highest figure (of under 6 per cent in 1993) in the postwar period.
Even apart from this, the medium-term fiscal position is in one respect much worse than in the early 1990s. Two types of public expenditure, on health and pensions, are heavily influenced by demographics. In the early 1990s the baby-boomer cohorts of the population were of working age and would remain so until roughly 65 years from 1947 (the year in which the birth rate peaked), that is, until 2012. From 2012 onwards the baby boomers become elderly, and will put upward pressure on health and pension expenditure, as well as ceasing to contribute significantly to tax revenues.
In another respect the government today is in a fortunate position. In the early 1990s, investors were so suspicious of promises by politicians, even Conservative politicians, to keep the public finances in good shape that they demanded a high real interest rate of about 5 per cent on gilt-edged securities. By contrast, the current real yield on index-linked gilts is 1-1¼ per cent, while the nominal yield on conventional medium-dated gilts is about 4 per cent, which is only 2 per cent above the official inflation target. The Labour government has been lucky, in that its ability to issue gilts on a low real yield has eased the task of maintaining financial stability.
Can doomsters tell a horror story about Britain’s public finances over the next few years? Suppose that investors in gilt-edged securities were to insist on real yields similar to those during the last period of Conservative rule. The danger of runaway debt interest costs – of an uncontrollable public debt Frankenstein’s monster – would then increase sharply. Since companies and individuals are already leaving the UK because of an excessive tax burden, the scope for tax increases is limited. The combination of a primary deficit of almost 10 per cent of GDP, adverse demographic trends and the potential for real interest rates to reach 5 per cent or more therefore justifies the widespread concern about the UK’s long-run fiscal solvency.
The next government will have a prolonged struggle to reduce public expenditure relative to national income. If there is any good news here, it is that David Cameron seems well-prepared. The Tory leader has already warned that he expects his government to be deeply unpopular after its first year in office.
The writer is chief executive of the newly established economics consultancy, International Monetary Research
Copyright The Financial Times Limited 2009
http://www.nytimes.com/2009/08/19/opinion/19buffett.html?_r=1&pagewanted=1&sq=gusher&st=cse&scp=1
The Greenback Effect
Times Topics: Warren E. Buffett
IN nature, every action has consequences, a phenomenon called the butterfly effect. These consequences, moreover, are not necessarily proportional. For example, doubling the carbon dioxide we belch into the atmosphere may far more than double the subsequent problems for society. Realizing this, the world properly worries about greenhouse emissions.
The butterfly effect reaches into the financial world as well. Here, the United States is spewing a potentially damaging substance into our economy — greenback emissions.
To be sure, we’ve been doing this for a reason I resoundingly applaud. Last fall, our financial system stood on the brink of a collapse that threatened a depression. The crisis required our government to display wisdom, courage and decisiveness. Fortunately, the Federal Reserve and key economic officials in both the Bush and Obama administrations responded more than ably to the need.
They made mistakes, of course. How could it have been otherwise when supposedly indestructible pillars of our economic structure were tumbling all around them? A meltdown, though, was avoided, with a gusher of federal money playing an essential role in the rescue.
The United States economy is now out of the emergency room and appears to be on a slow path to recovery. But enormous dosages of monetary medicine continue to be administered and, before long, we will need to deal with their side effects. For now, most of those effects are invisible and could indeed remain latent for a long time. Still, their threat may be as ominous as that posed by the financial crisis itself.
To understand this threat, we need to look at where we stand historically. If we leave aside the war-impacted years of 1942 to 1946, the largest annual deficit the United States has incurred since 1920 was 6 percent of gross domestic product. This fiscal year, though, the deficit will rise to about 13 percent of G.D.P., more than twice the non-wartime record. In dollars, that equates to a staggering $1.8 trillion. Fiscally, we are in uncharted territory.
Because of this gigantic deficit, our country’s “net debt” (that is, the amount held publicly) is mushrooming. During this fiscal year, it will increase more than one percentage point per month, climbing to about 56 percent of G.D.P. from 41 percent. Admittedly, other countries, like Japan and Italy, have far higher ratios and no one can know the precise level of net debt to G.D.P. at which the United States will lose its reputation for financial integrity. But a few more years like this one and we will find out.
An increase in federal debt can be financed in three ways: borrowing from foreigners, borrowing from our own citizens or, through a roundabout process, printing money. Let’s look at the prospects for each individually — and in combination.
The current account deficit — dollars that we force-feed to the rest of the world and that must then be invested — will be $400 billion or so this year. Assume, in a relatively benign scenario, that all of this is directed by the recipients — China leads the list — to purchases of United States debt. Never mind that this all-Treasuries allocation is no sure thing: some countries may decide that purchasing American stocks, real estate or entire companies makes more sense than soaking up dollar-denominated bonds. Rumblings to that effect have recently increased.
Then take the second element of the scenario — borrowing from our own citizens. Assume that Americans save $500 billion, far above what they’ve saved recently but perhaps consistent with the changing national mood. Finally, assume that these citizens opt to put all their savings into United States Treasuries (partly through intermediaries like banks).
Even with these heroic assumptions, the Treasury will be obliged to find another $900 billion to finance the remainder of the $1.8 trillion of debt it is issuing. Washington’s printing presses will need to work overtime.
Slowing them down will require extraordinary political will. With government expenditures now running 185 percent of receipts, truly major changes in both taxes and outlays will be required. A revived economy can’t come close to bridging that sort of gap.
Legislators will correctly perceive that either raising taxes or cutting expenditures will threaten their re-election. To avoid this fate, they can opt for high rates of inflation, which never require a recorded vote and cannot be attributed to a specific action that any elected official takes. In fact, John Maynard Keynes long ago laid out a road map for political survival amid an economic disaster of just this sort: “By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens.... The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.”
I want to emphasize that there is nothing evil or destructive in an increase in debt that is proportional to an increase in income or assets. As the resources of individuals, corporations and countries grow, each can handle more debt. The United States remains by far the most prosperous country on earth, and its debt-carrying capacity will grow in the future just as it has in the past.
But it was a wise man who said, “All I want to know is where I’m going to die so I’ll never go there.” We don’t want our country to evolve into the banana-republic economy described by Keynes.
Our immediate problem is to get our country back on its feet and flourishing — “whatever it takes” still makes sense. Once recovery is gained, however, Congress must end the rise in the debt-to-G.D.P. ratio and keep our growth in obligations in line with our growth in resources.
Unchecked carbon emissions will likely cause icebergs to melt. Unchecked greenback emissions will certainly cause the purchasing power of currency to melt. The dollar’s destiny lies with Congress.
[Updated on: Thu, 20 August 2009 01:41]
Behold, how good and how pleasant it is
For brothers to dwell together in unity!
Ps 133:1 NASB
|
|
|
|
|
 |
|
If you like the current financial crisis...
By: Macky on Thu, 20 August 2009 01:34 |
|
|
Scare story
By: acam on Thu, 20 August 2009 08:18 |
|
|
Re: Scare story
By: Macky on Thu, 20 August 2009 15:59 |
|
|
Re: Scare story
By: Nigel on Thu, 20 August 2009 20:15 |
|
|
Re: Scare story
By: Macky on Thu, 20 August 2009 21:01 |
|
|
Re: Scare story
By: ray2x on Fri, 21 August 2009 00:30 |
|
|
Re: Scare story
By: Macky on Fri, 21 August 2009 01:38 |
|
|
Re: Scare story
By: acam on Fri, 21 August 2009 08:06 |
|
|
Re: Scare story
By: arich on Fri, 21 August 2009 13:28 |
|
|
Re: Scare story
By: Macky on Fri, 21 August 2009 21:45 |
|
|
Re: Scare story
By: acam on Sat, 22 August 2009 08:23 |
|
|
Re: Scare story
By: Macky on Sat, 22 August 2009 23:27 |
|
|
Re: Scare story
By: ray2x on Mon, 24 August 2009 04:48 |
|
|
Re: Scare story
By: arich on Tue, 25 August 2009 13:49 |
Goto Forum:
[  ] |
A Place of Safety
Search
Help
Register
Login
Home
