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interestrateripoff

Us Faces One Of Biggest Budget Crunches In World – Imf

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http://blogs.telegraph.co.uk/finance/edmundconway/100005702/us-faces-one-of-biggest-budget-crunches-in-western-world-imf/

Earlier this week, the Bank of England Governor, Mervyn King, irked US authorities by pointing out that even the world’s economic superpower has a major fiscal problem -“even the United States, the world’s largest economy, has a very large fiscal deficit” were his words. They were rather vague, but by happy coincidence the International Monetary Fund has chosen to flesh out the issue today. Unfortunately this is a rather long post with a few chunky tables, but it is worth spending a bit of time with – the IMF analysis is fascinating.

Its cross-country Fiscal Monitor is not easy reading and is a VERY big pdf (17mb), so I’ve collected a few of the key points. The idea behind the document is to set out how much different countries around the world need to cut their deficits by in the next few years, and the bottom line is it’s going to be big and hard (ie 8.7pc of GDP in deficit cuts around the world, which works out at, gulp, about $4 trillion).

But the really interesting stuff is the detail, and what leaps out again and again is how much of a hill the US has to climb. Exhibit a is the fact that under the Obama administration’s current fiscal plans, the national debt in the US (on a gross basis) will climb to above 100pc of GDP by 2015 – a far steeper increase than almost any other country.

USnetdebt.jpg

Compare it with the UK, which is often pinpointed as a Greece in the making. As you can see, gross debt increases sharply, but not by anything like the same degree.

UKgrossdebt.jpg

Another issue is that, according to the IMF, the cost of extra healthcare and pensions will increase by a further 5.8pc over the next 20 years. This is the biggest increase of any other country in the G20 apart from Russia, and comes despite America having far more favourable demographics. It is significantly more than the UK’s 4.2pc.

But level of debt isn’t the only problem. Then there’s the fact that the US has a far shorter maturity of government debt than most other countries, meaning that even if it weren’t borrowing any extra cash it would have to issue a large chunk of new stuff each year as things are. The killer table to show you that is this one, which shows a country’s “gross financing needs” – in other words how much debt it has to issue in the coming years to keep itself functioning.

rollover1-460x266.jpg

Britain, as you can see from the second column on the left, has one of the biggest deficits in the world. However, because it also has the longest maturity of average debt in the world (far right column), and so doesn’t have to issue as much new debt each year just to keep rolling that stuff over, its gross financing needs are – at 32.2pc of GDP, way bigger than Britain’s, at 20pc. Come to think of it, it’s actually worse than Greece on this measure.

What does this mean? Basically with a large financing need, you are particularly vulnerable if the market suddenly decides it doesn’t want your debt, since those extra interest rates they charge you mount much more quickly. Japan, by the way, is the one with a real problem on this front. It could hardly be any more vulnerable to a sudden drop in investor demand, and many over there fear that the moment domestic savers stop buying JGBs, the country is doomed to Greek-style collapse (though it doesn’t share Greece’s current account deficit and, crucially, has its own currency, so I don’t know about that).

On the flip side, unlike Japan or Britain, the US does not have a central bank with quite such a large stock of government debt. Both the Bank of England and Bank of Japan have done so much quantitative easing (buying bonds with printed money) over the past few years that they have the power to cause a fiscal shock if they decided they wanted to sell off their bonds at once. This table shows you that America, while not entirely guiltless on this front, has less of a shadow hanging over it.

QE.jpg

More at the link.

Amazing how the BoE has ended up with govt debt when it said it wasn't going to fund govt spending...

It would appear everyone is playing smoke and mirrors. US deflects attention away onto the Euro with Greece, the French talk up the problems in the UK hinting that there would be no European bailout of the UK and then we draw the attention back onto the US!

The house of cards that is the global economy looks like it's about to collapse.

Still at least the govt induced recovery is locked in.

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http://blogs.telegraph.co.uk/finance/edmundconway/100005702/us-faces-one-of-biggest-budget-crunches-in-western-world-imf/

More at the link.

Amazing how the BoE has ended up with govt debt when it said it wasn't going to fund govt spending...

It would appear everyone is playing smoke and mirrors. US deflects attention away onto the Euro with Greece, the French talk up the problems in the UK hinting that there would be no European bailout of the UK and then we draw the attention back onto the US!

The house of cards that is the global economy looks like it's about to collapse.

Still at least the govt induced recovery is locked in.

So race to the bottom it is ...

What's the order?

EU, £, Yen, $

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Seriously.. countries do not need to withdraw stimulus spending and reduce deficit spending. The mainstream economic thought is still 'any day now things will get back to the way they were.' In the old economic paradigm it is true that these deficits would not be sustainable. But the old economic paradigm died in the fall of 2008. And its never coming back.

In the new order, first world national governments are going to be forced to run deficits of 12% of gdp for the forseeable future. People are afraid of the debt to gdp levels but at some point people will just forget about it. Even now people are starting to get used to the new normal of budget deficits of 12% of gdp.

Look Japan has been running deficits near 10% of gdp fro a long time, and honestly no one is worried. They are now nearing 200% of gdp as their national debt. While the UK is currently only at 60%. No one is worried about Japan's debt because it is something they have gotten used to.

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Seriously.. countries do not need to withdraw stimulus spending and reduce deficit spending. The mainstream economic thought is still 'any day now things will get back to the way they were.' In the old economic paradigm it is true that these deficits would not be sustainable. But the old economic paradigm died in the fall of 2008. And its never coming back.

In the new order, first world national governments are going to be forced to run deficits of 12% of gdp for the forseeable future. People are afraid of the debt to gdp levels but at some point people will just forget about it. Even now people are starting to get used to the new normal of budget deficits of 12% of gdp.

Look Japan has been running deficits near 10% of gdp fro a long time, and honestly no one is worried. They are now nearing 200% of gdp as their national debt. While the UK is currently only at 60%. No one is worried about Japan's debt because it is something they have gotten used to.

more forward extrapolation of the immediately preceding trend and conditions, they ought to call this site Everlasting trend.co.uk

Edited by Tamara De Lempicka

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Seriously.. countries do not need to withdraw stimulus spending and reduce deficit spending. The mainstream economic thought is still 'any day now things will get back to the way they were.' In the old economic paradigm it is true that these deficits would not be sustainable. But the old economic paradigm died in the fall of 2008. And its never coming back.

In the new order, first world national governments are going to be forced to run deficits of 12% of gdp for the forseeable future. People are afraid of the debt to gdp levels but at some point people will just forget about it. Even now people are starting to get used to the new normal of budget deficits of 12% of gdp.

Look Japan has been running deficits near 10% of gdp fro a long time, and honestly no one is worried. They are now nearing 200% of gdp as their national debt. While the UK is currently only at 60%. No one is worried about Japan's debt because it is something they have gotten used to.

I disagree you hit the problem of exponential growth of interest payments to service the debt, isn't Japan spending around 25% of govt income on debt service costs? At some point this will implode. It's elementary maths.

Edited by interestrateripoff

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I disagree you hit the problem of exponential growth of interest payments to service the debt, isn't Japan spending around 25% of govt income on debt service costs? At some point this will implode. It's elementary maths.

Ive already sent AA3 the deluxe famous Bloo Loo predictor kit, but I think he's having trouble with the marker unit...Ive sent him a penknife and instructions so he can more acurately plot the future.

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http://www.economicshelp.org/blog/economics/history-of-national-debt-in-japan/comment-page-1/

Also, the cost of servicing national debt is placing a great strain on any attempts to reduce debt. I have seen various figures for Japanese national debt, depending on which measure you use. But, national debt in Japan is 170% of GDP – more than twice the US, and is a much more serious problem than many seem to think. How long can Japan continue to fund such massive deficits?

debt-servicing-ratio.png

This graph shows how the cost of servicing Japan’s National debt has increased since the 1970s. It is a salutory reminder of the cost involved in a large public sector debt. The cost would be even higher, if interest rates were not so low in Japan.

Note: the cost of servicing national debt is not just the interest payment but includes a redemption cost(cost of repaying the bond at end of period – say 60 years)

(i.e. Cost of servicing National debt = interest payments + bond redemption + administrative costs) as a percentage of the central government’s retained tax revenue (=tax and stamp revenue – local tax transfers).

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http://www.japanreview.net/trends_interest_payment_government_bonds.htm

As a result of the successive issuance of the government bonds, the cost of overall national debt services (i.e., interest payments + bond redemption + administrative costs) reached approximately ¥16.8 trn in the FY2003 budget, amounting to 20.5% of general account expenditures. According to the Ministry of Finance, ¥9.1 trn of this cost is for interest payments, and amounts to 11.1% of general account expenditures. The amount of outstanding bonds have increased annually, along with annual bond issuance, but interest payment have been maintained at approximately ¥9 trn, or 1.8% of GDP, due to the historically low interest rates. If interest rates take a rising trend along with future economic recovery, interest payments will also increase accordingly.

interest_payment_ratios.gif

However, in addition to interest payments, a number of economists also acknowledge the growing question of Japan's redemption costs. In contrast to most other advanced countries, the redemption system for Japanese Government Bonds, or JGBs, is based on the use of sinking debt funds that distinguish between new bonds and refinancing bonds.

Known as the "60-year redemption rule," Japan's system requires JGBs to be completely redeemed in cash over a 60 year period irrespective of bond duration. These cash redemptions are required to be paid from sources other than refinancing bonds. For example, if ¥60bn-worth of 10-year JGBs were issued, ¥10bn would be subject to cash redemption 10 years later, with a ¥50bn balance redeemable through refinancing bonds; 10 years later, an additional ¥10bn would be subject to cash redemption, with a ¥40bn balance redeemable through refinancing bonds and so forth. The process continues until the ¥60bn of 10-year JGBs are completely redeemed through legitimate tax revenue sources. As government retained revenue is the final payable source of all its expenditures, the Ministry of Finance continues to look for ways to strengthen its debt management policies.

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Look Japan has been running deficits near 10% of gdp fro a long time, and honestly no one is worried.  They are now nearing 200% of gdp as their national debt.  While the UK is currently only at 60%.  No one is worried about Japan's debt because it is something they have gotten used to.

Aren't they mostly just paying themselves though? I thought that was the explanation for how they get away with it, Japan's debt is largely held in Japan.

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UK debt levels were much higher in the aftermath of WWII. Much of the industrial heartland had been bombed and there were all the costs associated with moving from a war time to a peace time economy.

The UK's current debt level is not "such" a huge problem provided we start to bring it under control now.

And we should be able to achieve that.

The country managed to navigate the post-war world economy. It retreated from empire without collapse.

Our labour market is more mobile and our economy less over-regulated than our GIIPS friends.

We faced down the depredations of the recession (I won't call it a restructuring) of the early 1980's.

Sure, some riots and civil and industrial unrest should be expected but we dealt with that back in the 1980's too.

A major advantage that we have is the "excessive" part of our debt had been incurred as a short term response to this financial crisis and recession. It is not the product of long term, misplaced, excessive spending patterns like in France and Germany.

I don't think we need to get used to these debt levels. We need to reduce them and that can certainly be done.

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UK debt levels were much higher in the aftermath of WWII. Much of the industrial heartland had been bombed and there were all the costs associated with moving from a war time to a peace time economy.

The UK's current debt level is not "such" a huge problem provided we start to bring it under control now.

And we should be able to achieve that.

However the last time there was the possibility of huge growth as everyone got TV's, Cars etc...

Where is the growth going to come from this time?

Are we all going to start buying those spaceships for quick trips to the moon?

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UK debt levels were much higher in the aftermath of WWII. Much of the industrial heartland had been bombed and there were all the costs associated with moving from a war time to a peace time economy.

The UK's current debt level is not "such" a huge problem provided we start to bring it under control now.

And we should be able to achieve that.

The country managed to navigate the post-war world economy. It retreated from empire without collapse.

Our labour market is more mobile and our economy less over-regulated than our GIIPS friends.

We faced down the depredations of the recession (I won't call it a restructuring) of the early 1980's.

Sure, some riots and civil and industrial unrest should be expected but we dealt with that back in the 1980's too.

A major advantage that we have is the "excessive" part of our debt had been incurred as a short term response to this financial crisis and recession. It is not the product of long term, misplaced, excessive spending patterns like in France and Germany.

I don't think we need to get used to these debt levels. We need to reduce them and that can certainly be done.

If you want an economic recovery nothing beats starting from a literally bombed-out world with a reduced population, and an on average far younger population. Comparing 1945-55 to today is pointless.

As for the 1980s, the "dealing with it" consisted of stuffing poorer peoples' mouths with the revenues derived from N Sea oil and throwing them a few hundred thousand ex council houses, while the middle classes got free money out of privatisations and carpet-bagging building societies.

As interestrateripoff points out, it is different this time.

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Each time is different.

Each time we deal with it.

thank you Nero.

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Last I looked, Rome wasn't burning but suffering from an excessive debt the result of a political response to an economic situation.

Hopefully, we will have an economic response now and the debt will be reduced to manageable levels.

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UK debt levels were much higher in the aftermath of WWII. Much of the industrial heartland had been bombed and there were all the costs associated with moving from a war time to a peace time economy.

The UK's current debt level is not "such" a huge problem provided we start to bring it under control now.

And we should be able to achieve that.

The country managed to navigate the post-war world economy. It retreated from empire without collapse.

Our labour market is more mobile and our economy less over-regulated than our GIIPS friends.

We faced down the depredations of the recession (I won't call it a restructuring) of the early 1980's.

Sure, some riots and civil and industrial unrest should be expected but we dealt with that back in the 1980's too.

A major advantage that we have is the "excessive" part of our debt had been incurred as a short term response to this financial crisis and recession. It is not the product of long term, misplaced, excessive spending patterns like in France and Germany.

I don't think we need to get used to these debt levels. We need to reduce them and that can certainly be done.

...the UK debt exposure to GDP took a steep dive for the better from late 40's early 50's ....rationing was maintained into the early 50's ...we should be looking at that to kick start the economy ....growth and reduced consumption must be a way forward to tip the ratio positively....we had to house millions when the troops from the war settled and married producing families ...Conservative Governments generated social council house growth creating jobs and austerity, high taxation and production were the themes ....time to study the model for what was in the context an accelerated recovery over the subsequent decades from the 250% debt to GDP ...introduce rationing, exchange control for overseas holidays and homes to reduce imports and consumption ...encourage grow your own.. .?..stop subsidising landowners not to farm and eat home grown and export surplus....at least we would be healthier....promote Buy 'Made in the UK' without being internationally protectionist.. ban BTL and interest only mortgages and anything which encourages inflation bubbles .... :rolleyes:

Edited by South Lorne

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Each time is different.

Each time we deal with it.

This time it's very different.

Watch and learn!

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Right, splendid, that's that one solved then.

Now, has anyone got anything worth worrying about out there?

Is my bonus safe?

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On the flip side, unlike Japan or Britain, the US does not have a central bank with quite such a large stock of government debt. Both the Bank of England and Bank of Japan have done so much quantitative easing (buying bonds with printed money) over the past few years that they have the power to cause a fiscal shock if they decided they wanted to sell off their bonds at once. This table shows you that America, while not entirely guiltless on this front, has less of a shadow hanging over it.

Of course a lot of this analysis depends on the accuracy of the official figures and statistics issued by the various governments and in Greece the official deficit figures issued were originally out by a factor of about 3/4 times.

Apparently hiding the figures like the Greeks is nothing unusual for governments although I suppose it's unlikely that the US and UK official figures would be quite so far out of touch with reality as the Greeks - but who knows.

Edited by billybong

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  • 259 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?


      • down 5% +
      • down 2.5%
      • Even
      • up 2.5%
      • up 5%



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