Posts Tagged ‘Government debt’

Last year I did a list of each country’s national debt divided by population to see what the next generation might either pay interest on or pay back.

Examples in $1000 per head:

UK 26.5

Ireland 35

Germany 28

France 31

Spain 17.5

Italy 38

Japan 83

USA 29

Canada 37

Norway 39

Australia 11.5

So what you might say? As a percentage of GDP it’s not so much … well that’s got naff all to do with it too unless there is a current a/c surplus … if you cut someone’s hair it adds to GDP but it hardly pays the £26,500 you owe on top of the £10,000 on your credit card.

Obviously, in the UK, with the old folks about to fund the out of work young folks as well as the civil servants, NHS etc (biggest GDP earners presumably and therefore the biggest ‘so what’ in this whole sad tale) this black hole is here to stay for a long time.

To get away from the obvious side of the story let’s have a look at the other side of the loans – the £26,500 each and every one of us had borrowed on their behalf… someone is the lender and so they will either ask for it back one day or extend the loan forever and the borrowers (you) will pay the interest. As the banks already went bust then presumably the debt is met by bond issuance from each government … “wow government – must be safe” bonds of course.

So who owns the bonds? i.e who is hoping to get paid back?  As it’s not countries per se nor banks so much, it must be the pension funds and the pension funds have your money in trust for when you retire. So the money they are going to give to you one day is indirectly the money you already owe ? And in order to realise that money, the pension funds have to redeem the bonds so the government has to find the money to give the pension providers to give to you….. enough of that … the real truth is that the government bought votes by indirectly spending your pension fund over the past few decades. The government borrowed from the very people it was robbing at the time. Many pension plans will have to go pear-shaped… whose will be first?  Do you doubt this? In that case just tell me who is going to produce your £26,500?

Any thoughts out there?

Patrick O’Connormist is this week’s guest contributor to The Money Spy blog

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Ken Rogoff and Carman Reinhart – the two academics who wrote that rather controversial paper suggesting that when public debt to GDP rises over 90 per cent, growth falls sharply – have come out fighting. And you know what, their observations not only make a lot of sense, they are pretty much smack on in agreement with what has long been argued here.

Let’s be fair to Rogoff and Reinhart, they are not arch Austerians. It is just that their work is often quoted by arch Austerians. And when serious loopholes were found in it, the likes of Krugman practically danced on what some say was Rogoff and Reinhart’s grave. The Austerians responded by saying that the errors found in the Rogoff Reinhart model were trivial, and did not unduly affect the conclusion.

Sometimes, however, you need to stop listening to the interpreters and listen to the original instead.

Take as an example this extract from the Rogoff and Reinhart paper: The Aftermath of Financial Crises published in 2009.    “The main cause of debt explosions,” states the paper, “is usually not the widely cited costs of bailing out and recapitalizing the banking system. The collapse in tax revenues in the wake of deep and prolonged economic contractions is a critical factor in explaining the large budget deficits and increases in debt that follow the crisis.” In short, the paper states the case of the anti-Austerians; government debt does not cause GDP to slow, rather slowing GDP causes government debt to rise.

Rogoff himself has gone on record as saying that the conclusions of the paper he co-wrote are often exaggerated.

In today’s FT, Rogoff and Reinhart produced an article that says it, clearly in black and white.

“To be clear,” they said, “no one should be arguing to stabilise debt, much less bring it down, until growth is more solidly entrenched.”

“Nevertheless,” they continue, “given current debt levels, enhanced stimulus should only be taken selectively and with due caution. A higher borrowing trajectory is warranted, given weak demand and low interest rates, where governments can identify high-return infrastructure projects. Borrowing to finance productive infrastructure raises long-run potential growth, ultimately pulling debt ratios lower. We have argued this consistently since the outset of the crisis.” See: Austerity is not the only answer to a debt problem 

Hear, hear to that. We need both. We need austerity and stimulus. This is no contradiction.

We need investment into infrastructure, energy, education, and (this is the one that ‘Investment and Business News’ has spoken up for more than anything else) into entrepreneurs.

But actually, move away from Rogoff and Reinhart and look instead at the National Institute of Economic and Social Research (NIESR), which under its director Jonathan Portes has looked very Keynesian in its attitude towards government debt and stimulus.

In NIESR’s latest paper on the growth prospects of the UK economy it recommended: “Investment in education, innovation and infrastructure is essential for future economic growth.” The paper stated: “With 10-year government bonds attracting yields of less than 2 per cent, the government can finance additional investment in much needed infrastructure at little cost. With an economy in such a depressed state the fiscal multipliers are likely to be far higher than in normal times.”

In short, the darling boy and girl of the Austerians, and NIESR, headed by one of the UK’s most articulate and apparently switched on Keynesians, are saying much the same thing.

Of course we need to see austerity, not just in Britain, but across much of Europe. In Greece, the public sector has been a drain on the economy for decades.

Of course we need stimulus, no stimulus at a time when households and companies are saving more will automatically mean less GDP.

So we need austerity in areas of the public sector that are bloated. We need stimulus in areas that will create not only more jobs in the short term, but also improved productivity in the long term.

What we don’t need are stimuli that just hand money to households and companies via tax cuts. Much of this money will be saved. There is no point in the government borrowing money to fund tax cuts that help the private sector to save more.

© Investment & Business News 2013

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When they talk about the Eurozone’s more problematic areas, Ireland is held up as a beacon of hope. For example, take these words uttered by Capital Economics: “Ireland remains a head and shoulders above the other peripheral euro-zone economies.”

But data out yesterday provided a sharp and quite nasty shock to such complacency.

In recent months while all around the Purchasing Managers’ Indices (PMIs) relating to manufacturing across the Eurozone have been dark, the Irish equivalent has been bright. Ireland showed that austerity can work. A country can suffer the ignominy of a bail-out, and despite staying the euro, enjoy impressive recovery.

Well maybe that is right, but take a hard look at the data. Unemployment is 14.7 per cent, the budget deficit was estimated to have been around 9 per cent of GDP last year, and government debt is predicted to be around 121 per cent of GDP at the end of this year.

Look at the story of growth. It was minus 5.5 per cent in 2009, minus 0.8 in 2010, plus 1.4 in 2011, and plus 0.7 in 2012. So last year and the year before, Ireland expanded – in fact it enjoyed one of the highest growth rates in Europe, which is what gave hope to its supporters. But many forecasters are predicting contraction this year and next.

Ireland’s growth is coming from exports. In 2009 it suffered a current account deficit worth 2.3 per cent of GDP. In 2012 it had a surplus worth 2 per cent of GDP, and is expected to have a surplus worth 3 per cent of GDP this year.

Ireland’s woes turned really nasty in 2010. That was the year when it ran a fiscal deficit of 30.9 per cent of GDP, and government debt rose from an average of 33 per cent of GDP between 1998 and 2008 to 65 per cent in 2009, to 106 per cent in 2011.

It just to goes to show, keeping government debt under control is not the secret to having a successful economy, and we have seen this over and over again in recent years. When the private sector hits a crisis, government debt can then soar.

But now we come to the really worrying part of Ireland’s story. The latest PMI for manufacturing came in at just 48.6. Okay so what does that mean? Any score under 50 is meant to suggest contraction. More to the point, Ireland’s latest PMI was the lowest reading in 14 months.

This does not mean Irish growth recovery is over, but it has most certainly hit a nasty hurdle.

©2013 Investment and Business News.

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