The Global Public Debt Problem

Niall Ferguson is worried about the impact of high public debt on interest rates around the world – you can read his article here.

32 replies on “The Global Public Debt Problem”

In the context of what seems to be a discussion of the global response to the crisis, Ferguson notes “Second, there is a good deal of “leakage” from open economies in a globalised world.” As best we know though, the globe is a closed economy.

…which ought to be good news, Karl, but is probably bad news since everyone is hoping to export their way to recovery…

@Karl Whelan “As best we know though, the globe is a closed economy.”

Sadly, Kevin beat me to the obvious punchline so I will have to say……

Unless you believe the conspiracy theorists that we are actually being run at the top by a bunch of aliens.

There are days when I think they might be right!

It’s hard to believe in a global response to a crisis when the track record shows – say one thing at a summit, go home and do something entirely different e.g. protectionism

Ferguson’s article is full of such silliniess. He asserts that fiscal policy contributed nothing to the recovery, claiming that zero rates did all the heavy lifting. Very Chicago. I imagine Krugman will have something to say about that: the central message of Keyenes was all about the efficay of fiscal policy when you are at the zero boundary.
Ferguson parrots the old crowding out stuff about high debt=high real interest rates. Well, we may well have war time levels of deficits and debt but real 10 year bond yields in the US are currently 1.35%. He argues that once the buyers of bonds stop buying then yields will rise. This guy is a historian remember, he probably thinks this is insight.
He cites Morgan Stanley as his authority for a forecast that bond yields will rise to 5.5%. Some authority. In any event, as a historian he should know that bond yields at 5.5% are not anaomalous. More a return to normal.
The fiscal crisis of the state has been concocted by Wall St. HEre is Tyler Cowen quoting Der Spiegel:

“Around 2002 in particular, various investment banks offered complex financial products with which governments could push part of their liabilities into the future,” one insider recalled, adding that Mediterranean countries had snapped up such products.

Greece’s debt managers agreed a huge deal with the savvy bankers of US investment bank Goldman Sachs at the start of 2002. The deal involved so-called cross-currency swaps in which government debt issued in dollars and yen was swapped for euro debt for a certain period — to be exchanged back into the original currencies at a later date.”

Guess who has been shorting Greece?

Sorry, the quote got truncated. Here is the important bit:

“But in the Greek case the US bankers devised a special kind of swap with fictional exchange rates. That enabled Greece to receive a far higher sum than the actual euro market value of 10 billion dollars or yen. In that way Goldman Sachs secretly arranged additional credit of up to $1 billion for the Greeks.

This credit disguised as a swap didn’t show up in the Greek debt statistics. Eurostat’s reporting rules don’t comprehensively record transactions involving financial derivatives. “The Maastricht rules can be circumvented quite legally through swaps,” says a German derivatives dealer. “

Don’t laugh – in the late 1950s, an Irish delegate, at a UN meeting, proposed that the imbalances of the time could be resolved if the surplus countries would agree to lend to the deficit countries: anything left over could go to the Red Cross.

@colm mccarthy
Ahead of his time, was he? It sounds very much like the arguments for “deficits don’t matter”, “governments don’t have to pay back debt”, and “balance of trade doesn’t matter”…

That fiscal policy matters is clear enough. That debt matters also seems to be evident. I have yet to see any realistic assessment of whether the future price is worth paying for jam today. Either debt has to be paid back in future, depressing future growth, so effectively borrowing from the future, or it has to be inflated away which, so far as I can see, is the same thing since the sellers of debt extract a future premium to make up for their losses. No?

@ Colm

Liam Cosgrave apparently told a UN debate on Suez that the Arabs and Jews should behave like Christians towards one another.

Maybe that’s as reliable as the story that the BBC called Ronnie Delaney a Brit!

Niall Ferguson is in his element with the Doomsday scenarios.

Samuel Brittan said last year that the UK’s debt ratio has historically been much higher – “more than 200% after the Napoleonic wars and again after the second world war – without the disasters predicted by prophets of doom. These prophets may point to the current Irish crisis as a contrary example.

This ignores the fact that 80% of the Irish national debt is held by international investors, compared with 30-40% in the case of the UK and the US.”

Most of Japan’s debt is locally financed at the almost zero rate and an offset of pension funds give its a net debt ratio of about 108%.

Brittan said in 1956 the UK debt ratio was just under 150%. Harold Macmillan, who was chancellor at the time, quoted the historian Lord Macaulay: “At every stage in the growth of that debt it has been seriously asserted by wise men that bankruptcy and ruin were at hand; yet still the debt kept on growing, and still bankruptcy and ruin were as remote as ever.” In fact the debt was gradually reduced from the peaks mentioned above without any heroic gestures.

The American problem is as much about not enough taxes as a problem with spending and economic growth.

Almost 20% of the federal budget goes on defense.

Ireland’s export markets are in the advanced countries and it is foolish to believe that vigorous growth is the most likely scenario in coming years.

The absolute level of interest rates is irrelevant. What matters, in terms of a public debt crowding out effect, is whether private enterprise is facing a premium over what they would otherwise have to pay to get that capital.

The fact that capital is cheap compared to boom times is good news. The question is, is it cheap enough?

Higher public debt means we are allocating more of our current production to things that govts buy.

By definition, this means allocating less to things that govts don’t buy.

The problem there is that govts tend not to spend their money very well.

The policy response to the 2001 Nasdaq bust was to lower interest rates to stimulate private debt growth and thus economic growth. This followed the pattern since the 1950s where the response to short-term economic weakness has been to encourage greater private sector indebtedness as a means of spurring private sector economic activity. Unfortunately that game is at (or very near) an end in the western world. The private sector there has maxed out on debt. In Ireland we can see all too well what that can mean.

The global policy response to our current crisis has been for the public sector to assist private sector borrowers and especially the financial system with thier debt burdens. But this means that an already pretty indebted public sector must take on significant additional liabilities. And that is before we consider public sector liabilities that are not accounted for by the system (unfunded pension liabilities, healthcare costs that will rocket as populations get older etc). If central banks are lenders of last resort, governments have become the borrowers of last resort.

But what happens when governments too eventually max out on debt? Answer: a financial crisis much worse than the near-death experience of 2008 as additional debt will hardly be available as a policy response. Brutal deleveraging – along the lines of pre US central bank financial crises of the 1800s – could then occur.

That might be 20 years away. But it one of those low-probability / high-cost events that people should be looking out for.

Is there a credible solution to the debt problems posited by Ferguson or is the best policy to decide that Brittan, as quoted by Michael Hennigan, is correct thereafter simply believe that “it will never happen”?

Is there any sense that western countries might move towards protectionism by requiring trading partners to adhere to greater standards of workers’ rights?

@Michael Hennigan:

“Almost 20% of the federal budget goes on defense.”

It think the idea was that the US Army was going to pay for itself……..

(Off topic: I came on here today looking for discussion/comment on Cormac Butler’s article in today’s IT – seems like an excellent piece on bonuses etc?)

@Cormac Lucey
That pretty much nails it for me.

Neverending debt and inflation at or near to 2% are not compatible.
Borrowers getting into debt repayment trouble at near-zero rates does not betoken borrowing capacity. The banks are bust because their borrowers are bust.
Is there a benefit to adding governments to the list without taking other people off it? I could accept increasing government indebtedness if it lead to decreasing private sector indebtedness, but it doesn’t. It both crowds out (in productive terms) and supplements (in absolute terms)…

One of the many strange features of the current debt panic, and the sometimes outlandish scenarios that are alleged to illustrate it, is the absence of discussion about the sources and uses of debt.

In common with all the countries that have experienced a deterioration in government finances, a collapse in Ireland’s taxation revenues is the main source of the deficit. ‘Saving’ by cutting expenditure is as useful as saving the bus fare by not going into work 1 day a week, and about as productive. Ireland’s deficit/GDP ratio has more than doubled since this savings programme began.

Likewise, government debt has itself become a demon, in a strangely emotive and illogical discourse. A more sober assessment might introduce notions such as cost-benefit analysis, or return on investment.

Currently, Ireland can borrow long-term funds at a little over 4%. Where prospective rates of return are below that, say, for zombie banks and their creditors, the borrowing is unproductive. But in assessments and evaluations of the long-abandoned Natonal Development Programme, rates of return for government investment projects are estimated at between 7.5% and 18%, dependent on the project. With those rates of returns borrowing is a boon both to the economy and to government finance, and refusal to do so is negligent.

” ‘Saving’ by cutting expenditure is as useful as saving the bus fare by not going into work 1 day a week, and about as productive. ”

That depends entirely on what you do when you get to work, and what else you might have been able to do with the bus fare.

Speaking of which, I better go earn my busfare…

I do think that the distinguished people who post on this site should not lower themselves to discuss the the views of this man, Niall Ferguson. It gives him a credibility that he does not deserve. Ferguson is primarily an historian, not an economist. Moreover, not just any old historian, but an historian of the pro-imperialist far right, whose views consist of little more than that continental Europe should be part of the German Empire, and the rest of the world part of the British Empire. He has long been considered as anti-Irish. What economics views he hold are primarily derived from his pro-imperialist view of history.

Last May, Ferguson gleefully forecast that Ireland would soon go bust. Few paid much attention to this prediction as, in so far as he is an economist at all, he belongs to the Glasgow Rangers Billy Boys School of Economists. I notice he hasn’t repeated his now discredited prediction about Ireland in this article, something which must pain him immensely.

@ JtO

i did both Economics as well as History of Economics for my Leaving Cert, and unfortunately the latter is far more interesting to read than the former! As such, with your useful categorization of Ferguson as an historian first and foremost, this probably explains why, economic ideology aside, Ferguson is such a popular and widely read commentator. Agree with him or not, he’s a very good storyteller.

@ zhou_enlai

The biggest potential threat will come from China.

There is a danger China will overreach in dealing with a perceived weakened West.

If the RMB is still pegged to the US dollar into 2011 and US jobs growth is only at an average of 95,000 per month as the White House forecast today for 2010, Obama will be under pressure to impose a special tariff on Chinese goods, heading towards an election year. Besides, he would look foolish opposing a measure that Congress itself could enact.

Some 55% of China’s population is rural and 73% of India’s.

The typical manufacturing monthly wage is $120 in China.

Over the decade, there will be a huge threat to the manufacturing base in the West – – better paying jobs than flipping burgers – – for example, China is the world’s biggest steel producer and its steel industry accounts for nearly half of global output. In fact, its output is so large that it matches the combined output of the next four biggest steel makers, namely: Japan, the United States, Russia and India.

Industrial overcapacity in China is “wreaking far-reaching damage on the global economy”:

And in the Developing World, the undervalued renminbi is also creating havoc:

China says currency exchange rate close to “reasonable” level:

@Michael Burke

The people involved in the Limerick Regeneration Programme would like to talk to you. You have very valid points, imho, here – particularly on moving beyond the short-term fixation with zombies to medium and longer term productive activity ……….

@David O’Donnell
What we have at the moment is a fearing frenzy that’s now only benefitting the speculators. Greece’s previous government deceived Brussels. Brussels – angry and not wanting to waste a good crisis – put the screws on Greece. The bond market mania that fed on this now threatens to spill completely out of control.

Worrying ourselves about Greece’s future pension liablities so much that we are speculating on their defaulting, becoming a dictatorship and causing the breakup of the euro as all the other PIIGS are driven out, is insane. Greece’s future pension liabilities are a problem for Greece. This is Europe committing suicide for fear of Greeks living too long.

I do agree their is a huge fear of the future across the world. I am sure
these panics happened many times in the past and will happen many times in the future. There will be difficulties but humanity is adaptable and resilient. Yes we can.

I hope the Greek Prime Minister, representative of a great nation, spoke to Angela Merkel in a sentiment similar to those Captain Kirk spoke to Klingon Chancellor Azetbur at the end of Star Trek Six.

“[The Enterprise and Excelsior crews have just averted the assassination of the Federation president]
Azetbur: What’s happened? What’s the meaning of all of this?
James T. Kirk: It’s about the future, Madame Chancellor. Some people think the future means the end of history. Well…We haven’t run out of history quite yet. Your father called the future…the undiscovered country. People can be very frightened of change.
Azetbur: You’ve restored my father’s faith.
James T. Kirk: And you’ve restored my son’s.”

@Oliver Vandt – “I do agree their is a huge fear of the future across the world. I am sure these panics happened many times in the past and will happen many times in the future. There will be difficulties but humanity is adaptable and resilient. ”

In the past you may well have been right. But in this time of instant communication and interwebby stuff, I’m not so sure. Fear and panic managed to spread wide and fast without the technology to make it do so even faster.

Financial institutions rail against new regulations. It’s a panic reaction they say. However, the financial markets they drive are incredibly panicky. BOOM! CRASH! BOOM! CRASH! in an endless cycle. In fact, they profit from the instability, or hope to. This can’t go on. They’ve gone too far this time surely. Ireland should back Sarkozy 100%. Then we might get 50% of what is necessary. One thing is sure. The IFSC are the most likely means our establishment will next use to destroy the country.

Graham Stull
You said capital is cheap? Not when inflation of assets, purchased by borrowed capital, is negative! 0% interest rate and 10% deflation rate means capital invested costs 10%! No one will part with cash under those terms!

Cormac Lucey
“Brutal deleveraging – along the lines of pre US central bank financial crises of the 1800s – could then occur. That might be 20 years away. But it one of those low-probability / high-cost events that people should be looking out for.”
A perfect summary of what is happening now for the west and has been happening in Japan for years.

As fiat currencies decline, as low interest rates proliferate, to avoid the brutal deleveraging that is occurring anyway, the only things that hold value are commodities, including food. This appears to be an inflation while money supply actually diminishes. This is where we are and will be! Not a recession.

The resolution may be even 30 years away! All that debt has to be paid off, as sovereigns never default. Except they do! All the debt will be picked up by governments as they are dependent on special interests who will pay them to do just that! The only ones who cannot get rid of their liabilities is the mass of voters as their liabilities are too great! This all takes time ….. lots of time. The unemployed will also have lots of time…… wonder what they will be thinking?

Olive Plant
Reaction is often factored into and indeed desired by those who set in motion those things that provoke that reaction. In times of panic, I find taking time to think pays dividends, otherwise the herd ends up running off the edge of that cliff that someone has previously disguised as light hedging!

Michael Burke
You are correct. Except that waiting will reduce costs further and increase economic benefit accordingly. Not waiting is NAMA. Waiting is being both productive and efficient. The economy is still bubble afflicted. NAMA will ensure that it is bubble afflicted for longer!

Michael Hennigan – Finfacts

You continue to provide an excellent service Michael!

There will be no jobs growth in the USA. For a long time. Expect to see military recruitment increase, with citizenship and college as enticements.

The Yuan can fall in value, if the PLA want it to! It is a command economy. Much of the US manufacturing has gone to China at the behest of the corporations and their shareholders. This enables the Han to avoid revolution by creating a middle class based on vast increases in wealth. India may not follow as quickly. It is more spiritually inclined and the secular short term propaganda of the west is more easily evaded and resisted. The west is behind this plan. Suck it up, people! We will not have a nuclear winter. That is still good news.

Western economies have been allowed to retain certain industries, provided they are competitive with the Han they will survive. With factories that often do not use conveyor belts ……because it is still cheaper to use human labour to move goods and parts, this may be an ask for a couple more decades! The Han are converting to a petroleum and coal rich economy. Just like the West, in fact. It took us 200 years. They have a helping hand from us in the west. Shouldn’t take more than 50 years or so? Luckily they started a while ago! The BRIC are now the engine and source of all world growth. Better be nice to them!
Pointlessly demonizing them will not help, except as a means of social control in the west…… And you do believe in that don’t you?

Remember, the USA can destroy them, but they are in business. War that destroys markets is not good news.

Welcome to the New World Order!

All hail Obama! (Remember he is at least one quarter Biffo!)

“Industrial overcapacity in China”

Well hang onto your hat! It will increase again and again. It will at least treble. They are working on extremely efficient electrical devices, some of which may be very usefil in cutting power consumption in the West. Increasing survival chances of many. We will not be short of goods, and they will be cheap. We will be able to afford them. They are not the problem. Will our children be able to afford housing? Yes, but that will mean that prices will fall faster than currencies. Look out below!

@Pat Donnelly – ““Industrial overcapacity in China”

Well hang onto your hat! It will increase again and again.”

My view is that it has to keep increasing or there would be riots in China as millions of unemployed go on a rampage. The party will keep things growing until they come up with a solution – like a war or something. I’m not moving to Taiwan any time soon that’s for sure. A nice little scrap over that between the USA and China (using lots of reserve troops from civilian life) would do wonders for both their unemployment problems.

Haven’t you yet figured out that Formosa is not and never was part of the middle kingdom? Like Iran, it is just a way of selling arms to idiots. Mind you, now that there is so much over-capacity TPTB may well have a couple of shootin’ wars in mind. Iean only released hostages once RR was in as the CIA had asked them to, torpedoing James Carter. Remember that the USA bought drugs from Iran in order to supply arms to Nicaragua.
PRC have said that if there are tsunami on their east coast they will launch against the USA. That from their training academy General after Aceh…. Read up about HAARP, Joe.

Take off the (I?) from PI(I?)GS. Like Japan , most of Italy’s debt is locally financed at the almost zero rate and an offset of pension funds give its a net debt ratio of far less.

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