Jump to content
House Price Crash Forum
stormymonday_2011

New Returns Show Dire Need To Cut Our Deficit

Recommended Posts

No not the UK this time but Ireland.

This interesting piece from the Irish Independent was posted on the Market Ticker

LAST Wednesday's Exchequer returns, despite all protestations from government quarters, show once again how weak Ireland's financial position is. As it stands, the current budget deficit is €7.8bn and will top €20bn by the end of the year.

This is on top of the €24bn budget deficit run up last year and the €12.7bn deficit from 2008. Meanwhile, the additional cost of borrowing this year's shortfall alone is about €1bn. This is why the need to reduce Ireland's staggering deficit is so pressing.

Despite all the hopeful comments from the Government that the latest Exchequer figures are "broadly in line with expectation", the truth is far more dire.

The true cost of Ireland's economic calamity is best illustrated by the fact that, since 2007, the national debt has doubled to €75bn and by 2014 that figure will double again to €150bn, according to official government figures.

It is apparent that the initial bank bail outs and the recent cuts in pay, pensions, jobs etc are not enough.

The Irish people have had to fork out a further 10.3 billion Euros to prop up Anglo-irish and to add insult to injury look likely to be taxed on everything that moves to pay for the privilege.

http://www.independent.ie/opinion/analysis/new-returns-show-dire-need-to-cut-our-deficit-2209681.html

NAMA really is the mother of all bail outs of a privileged and well connected few by an impoverished many.

One wonders how long the Irish people will take it or will they just simply emigrate

Edited by realcrookswearsuits

Share this post


Link to post
Share on other sites

What happens is when they cut back it reduces the money flowing through the economy. Making it harder for the private sector people to make money. Which reduces their income and thus income tax payments.

It creates a deflationary death spiral. But unfortunately for them the debt is priced in nominal Euros, so as incomes shrink that debt gets bigger and bigger.

It is especially true in the modern political economy where government spending is around 50% of gdp. If you look 100 years ago the state was around 5-10% of gdp. So its decisions did not have such a macro economic effect.

Share this post


Link to post
Share on other sites

What happens is when they cut back it reduces the money flowing through the economy. Making it harder for the private sector people to make money. Which reduces their income and thus income tax payments.

It creates a deflationary death spiral. But unfortunately for them the debt is priced in nominal Euros, so as incomes shrink that debt gets bigger and bigger.

It is especially true in the modern political economy where government spending is around 50% of gdp. If you look 100 years ago the state was around 5-10% of gdp. So its decisions did not have such a macro economic effect.

"What happens is when they cut back it reduces the money flowing through the economy" - that isn't strictly true (despite Gordon Brown misleadingly saying so). IIRC, if the national debt is internal debt, there isn't a problem* - it just means that the private sector has deferred spending for another day, in exchange for government spending today. In this respect, it is a closed loop - the same amount of money is flowing, just that the government is spending it instead of the people directly. Japan and Italy, haven't got much external debt and are in a less risky position because of this.

However, external debt is created from capital flowing in from other countries. While external capital coming in may feel good in the short term, but just like any credit, it has to be paid back - taking money out of the economy. As Ireland's external debt is over 1000% of GDP (gross, not net though), the second highest in the world, they are surely in a very precarious position?

All of which begs the question: why did Ireland take on so much external debt? Didn't it just create a sugar rush of capital, which they are now feeling the come down from? Surely, they must have known they couldn't keep relying on foreign capital indefinitely?

* That's not to say there shouldn't be a debate on the level of internal debt, due to issues like inter-generational transfer of wealth and such, but it neither puts in or takes out money from the economy - it's neutral. That said, the velocity could change, if the government was willing to spend, but the private sector wasn't (and/or the banks were hoarding).

EDIT: BTW, here is an interesting wee article about the external debt levels. Rather worrying, I think you will agree, particularly for Ireland... :ph34r:

Edited by Traktion

Share this post


Link to post
Share on other sites

Good points about external and internal debt and the money going to different people but still being in the economy one way or another. Another factor is that some nations like the USA and Japan the debt is priced in their own currencies. Which they can print an unlimited amount of if they felt like it.

For Ireland and Italy I believe its mainly in Euros so they do cannot conjure it out of thin air. And also your point that Italy's debt although in Euros is owed to Italians, so it is basically taking from some Italians and giving to others.. heck most of the time it is probably the same people.

Share this post


Link to post
Share on other sites
Guest The Relaxation Suite

What happens is when they cut back it reduces the money flowing through the economy. Making it harder for the private sector people to make money. Which reduces their income and thus income tax payments.

It creates a deflationary death spiral. But unfortunately for them the debt is priced in nominal Euros, so as incomes shrink that debt gets bigger and bigger.

It is especially true in the modern political economy where government spending is around 50% of gdp. If you look 100 years ago the state was around 5-10% of gdp. So its decisions did not have such a macro economic effect.

Government spending you mean govt. debt? Overall external debt to GDP ratio in UK is now highest in world at a staggering 417% (the next being Portugal at 243%) and its public debt to GDP ratio is 77%, the sixth highest in the world.

Britain, by all accounts, should really have imploded by now.

Share this post


Link to post
Share on other sites

Government spending you mean govt. debt? Overall external debt to GDP ratio in UK is now highest in world at a staggering 417% (the next being Portugal at 243%) and its public debt to GDP ratio is 77%, the sixth highest in the world.

Britain, by all accounts, should really have imploded by now.

The overall external debt is more a function of us being an international money center. For example an international investor holds money in a UK bank. That money is a liability to the bank and an external debt to Britain.

Where that could get 'interesting' is if the bank has invested in risky assets that blow up, and the bank is in danger of failing. Will our government bail them out.. yes.

Switzerland is in the same boat, their external debt to gdp is also over 400%.

Share this post


Link to post
Share on other sites

The overall external debt is more a function of us being an international money center. For example an international investor holds money in a UK bank. That money is a liability to the bank and an external debt to Britain.

Where that could get 'interesting' is if the bank has invested in risky assets that blow up, and the bank is in danger of failing. Will our government bail them out.. yes.

Switzerland is in the same boat, their external debt to gdp is also over 400%.

Indeed. I'd be interested to see what percentage of the external debt is public. I found an interesting article here about the PIIGS and the problems they will/are having repaying it.

Markets are increasingly concerned that the Greek debt crisis could spread to other Eurozone countries including Portugal, Ireland, and Spain. This column notes that much of these countries' debt is held by non-residents meaning that the governments do not receive tax revenue on the interest paid, nor does the interest payment itself remain in the country. The solution lies with debt restructuring and rescheduling.

Financial markets are focused on the public finances of Portugal, Ireland, Greece, and Spain (the “PIGS”). The PIGS´ public profligacy is partly to blame for their current plight, but other factors are at play. Amid the hype, little attention is paid to the crucial difference between these nations’ public debt and their external debt.

- Debt held by a nation’s own citizens has less pernicious consequences (Scott 2010) – the interest paid is returned to the domestic economy.

- External debt, if used to finance non-productive expenditure, is a different matter. Non-residents receive the interest on such debt, making the nation poorer with every interest payment.

--table image--

The facts: Internal versus external debt burdens

The PIGS’s problem is that a significant share of their debt is external (see Table 1).

- Greece, for example, has approximately 79% of government gross debt held by non-residents and has net international investment position of -82.2% of GDP. Interest payments on public debt represented nearly 40% of Greece’s already large 2009 budget deficit – and this is set to increase.

- Italy, by contrast, does not face the same challenge. Italy’s public debt reached 115% of GDP at the end of 2009, but Italy’s net international investment position were just about -19% of GDP. So, much of Italy’s interest burden is paid to Italians, and some of it is paid back to the government as taxes. As a result, Italy’s public debt dynamics are better than those of the PIGS.

...

Past precedents (Table 2) and the size of the required current-account adjustment (Table 3) suggest that the PIGS too will be unable to significantly reduce their external debt, regardless of the austerity of their budgetary policy. The PIGS’ high external indebtedness is detrimental to these nations’ public debt dynamics, through the interest income and tax revenue leakage effects identified above. For these reasons, it is probably a good idea to allow bygones to be bygones – some form of external debt restructuring is required.

...

The article continues and makes interesting reading. I don't understand why more noise hasn't been made about this. The difference between the types of debt is crucial. Portugal, Ireland and Spain look to be in an awful situation, completely at the mercy of international investors, without even the chance of printing their way out of it.

I'm not an economist and much of this stuff I'm learning as the years pass by, with the help of others on this website. However, I wonder why this isn't the sort of issue we are told about. Jabbering on about the national debt being too big is misleading, purely because internal public debt isn't a monetary problem (within reason), but more a political issue - it's just recycling money within a country, albeit rewarding those with capital and changing the balance of the economy (from the poor to the rich, young to old*).

* You would have thought Labour would have attempted to understand this and stop borrowing to spend; it is completely counter productive. Not only is borrowing to spend on benefits and other social programs unsustainable, it also redistributes more money to the wealthy, from the current taxpayers for internal debt and bleeds capital away from the country for external debt . Meh! :blink:

EDIT: Added extra quoted text.

Edited by Traktion

Share this post


Link to post
Share on other sites

What happens is when they cut back it reduces the money flowing through the economy. Making it harder for the private sector people to make money. Which reduces their income and thus income tax payments.

It creates a deflationary death spiral. But unfortunately for them the debt is priced in nominal Euros, so as incomes shrink that debt gets bigger and bigger.

It is especially true in the modern political economy where government spending is around 50% of gdp. If you look 100 years ago the state was around 5-10% of gdp. So its decisions did not have such a macro economic effect.

This is the same condundrum the UK will now grapple... can it reduce public expenditure and deliver growth in the economy at the same time.... it is certainly possible to mismanage the situation and cut too fast, it is certainly necessary to cut as quickly and deeply as possible but still unclear whether cuts and gdp growth can run side by side.

Irelands economy was pretty imbalanced and is even more so now..... it wouldn't surprise me with tax receipts so low if one of these small economies ( actually I think we should have done it a while ago) doesn't try and become am offshore centre and aim to attract more companies and individuals out of high tax countries... there'd be all hell to pay if they could do it as it would hurt other euro economies but desperates measures are taken by the desperate.

I'd love it if the uk suddenly adopted a more swiss style approach to attracting individuals and companies through a mix of measures and actually used a different tax regime to stimulate investment and growth. I'm not convinced we'd have the infrastructure to handle it but it'd be interessting to look at.

Share this post


Link to post
Share on other sites

Indeed. I'd be interested to see what percentage of the external debt is public. I found an interesting article here about the PIIGS and the problems they will/are having repaying it.

The article continues and makes interesting reading. I don't understand why more noise hasn't been made about this. The difference between the types of debt is crucial. Portugal, Ireland and Spain look to be in an awful situation, completely at the mercy of international investors, without even the chance of printing their way out of it.

I'm not an economist and much of this stuff I'm learning as the years pass by, with the help of others on this website. However, I wonder why this isn't the sort of issue we are told about. Jabbering on about the national debt being too big is misleading, purely because internal public debt isn't a monetary problem (within reason), but more a political issue - it's just recycling money within a country, albeit rewarding those with capital and changing the balance of the economy (from the poor to the rich, young to old*).

* You would have thought Labour would have attempted to understand this and stop borrowing to spend; it is completely counter productive. Not only is borrowing to spend on benefits and other social programs unsustainable, it also redistributes more money to the wealthy, from the current taxpayers for internal debt and bleeds capital away from the country for external debt . Meh! :blink:

EDIT: Added extra quoted text.

It is.

It's just that the Calvinists and hoarders insist it is the 'fault' of these lazy inefficient people.

In fact, it is the Calvinists and hoarders who have been recycling their money through these poorer nations that are at the root of the problem. I'd imagine much of the reason they did this was to avoid more stringent local tax regimes. i.e. It's far easier to hide capital and avoid taxes if you channeled it via Greece, Ireland or Iceland than kept it in Germany, for instance.

When it all turns to sh1t you then tell the Greeks, Irish, Germans how they've f*cked up their economy, have been living too high a lifestlye and otherwise make them feel thoroughly guilty and full of self-loathing, and insist they must pay back the debt i.e. at no risk to the real culprits. The foreign banks and investors.

In the case of the piggies they ought to stick two fingers up and tell the foreign banks to get stuffed.

Unfortunately, as we know, the politicians are owned by these banks and foreign entities one way or another, and thus we end up with enforced, painful and deflationary fiscal measures - none of which resolve the underlying problem which is the imbalances which led to the surplus capital flowing there in the first place.

Capital owners need to take their pain - but they are refusing to. It's actually quite bizarre that those who claim to be prudent, hard working and thrifty have caused this problem by externalising it. They're in denial. Just read all the threads on here about 'thrift' and 'hard working' and 'not spending more than you earn' etc and you'll see how deepseated this denial runs. It's endemic.

Share this post


Link to post
Share on other sites

.....

* You would have thought Labour would have attempted to understand this and stop borrowing to spend; it is completely counter productive. Not only is borrowing to spend on benefits and other social programs unsustainable, it also redistributes more money to the wealthy, from the current taxpayers for internal debt and bleeds capital away from the country for external debt . Meh! :blink:

....

"New" Labour don't care about the poor - they are the party of the Daily Mail. Sadly, Mr Dacre couldn't be trusted and backed his old friends just after Gordon bailed out the bankers. Blair is the criminal - Brown the fall guy.

Share this post


Link to post
Share on other sites

"What happens is when they cut back it reduces the money flowing through the economy" - that isn't strictly true (despite Gordon Brown misleadingly saying so). IIRC, if the national debt is internal debt, there isn't a problem* - it just means that the private sector has deferred spending for another day, in exchange for government spending today. In this respect, it is a closed loop - the same amount of money is flowing, just that the government is spending it instead of the people directly. Japan and Italy, haven't got much external debt and are in a less risky position because of this.

However, external debt is created from capital flowing in from other countries. While external capital coming in may feel good in the short term, but just like any credit, it has to be paid back - taking money out of the economy. As Ireland's external debt is over 1000% of GDP (gross, not net though), the second highest in the world, they are surely in a very precarious position?

All of which begs the question: why did Ireland take on so much external debt? Didn't it just create a sugar rush of capital, which they are now feeling the come down from? Surely, they must have known they couldn't keep relying on foreign capital indefinitely?

* That's not to say there shouldn't be a debate on the level of internal debt, due to issues like inter-generational transfer of wealth and such, but it neither puts in or takes out money from the economy - it's neutral. That said, the velocity could change, if the government was willing to spend, but the private sector wasn't (and/or the banks were hoarding).

EDIT: BTW, here is an interesting wee article about the external debt levels. Rather worrying, I think you will agree, particularly for Ireland... :ph34r:

I think you are conflating external debt and capital inflows. External debt are debt instruments denominated in a foreign currency which is payable to a foreigner. Just because you borrow foreign currency - I don't think it follows that the capital must flow inwards - with the domestic currency being bought. I would imagine a fair % of external debt is balanced by external assets.

Edited by Alan B'Stard MP

Share this post


Link to post
Share on other sites

Capital owners need to take their pain - but they are refusing to. It's actually quite bizarre that those who claim to be prudent, hard working and thrifty have caused this problem by externalising it. They're in denial. Just read all the threads on here about 'thrift' and 'hard working' and 'not spending more than you earn' etc and you'll see how deepseated this denial runs. It's endemic.

+1.

It is the reluctance of capital owners to take their lumps which is really the preventing the writedowns and the debt restructuring that is inevitable.

Austerity without these additional measures is simply pointless.

Similarly attempting to reflate the economy without asset price, bond and equity write downs is also doomed to fail.

The debts need to be restructured before any of the other measures can be attempted.

This is why this crisis will just run and run.

One only has to see the resistance to quite modest CGT changes in the UK to see how some section of society are not prepared to yield a penny while expecting other to shoulder all the burden.

Ireland is the case par excellence of this occurring and its impact is only now becoming fully apparent. As the tax burden grows and the living standards continue to shrink for the majority of the population then I expect emigration and depopulation to become the norm in the country again. Of course that will leave even fewer people capable of picking up the debt bill.

The solutions currently being touted are simply not sustainable

Edited by realcrookswearsuits

Share this post


Link to post
Share on other sites

I think you are conflating external debt and capital inflows. External debt are debt instruments denominated in a foreign currency which is payable to a foreigner. Just because you borrow foreign currency - I don't think it follows that the capital must flow inwards - with the domestic currency being bought. I would imagine a fair % of external debt is balanced by external assets.

In simple terms, do you mean that not all of the external debt is government debt? Assuming you mean that some of the external debt is liabilities for loans overseas?

If so, I agree - on first reading, I didn't realise external debt included private debt too, which is why it was probably a bit misleading. As AA3 points out, much of our external debt will be due to our large financial sector lending overseas.

It would be good to get a breakdown of external government debt (capital inflows?), as is provided for the PIIGS in the link in my above post. Is there a term for this?

Share this post


Link to post
Share on other sites

In simple terms, do you mean that not all of the external debt is government debt? Assuming you mean that some of the external debt is liabilities for loans overseas?

If so, I agree - on first reading, I didn't realise external debt included private debt too, which is why it was probably a bit misleading. As AA3 points out, much of our external debt will be due to our large financial sector lending overseas.

It would be good to get a breakdown of external government debt (capital inflows?), as is provided for the PIIGS in the link in my above post. Is there a term for this?

This from the CIA factbook

https://www.cia.gov/library/publications/the-world-factbook/rankorder/2186rank.html

This entry records the cumulative total of all government borrowings less repayments that are denominated in a country's home currency. Public debt should not be confused with external debt, which reflects the foreign currency liabilities of both the private and public sector and must be financed out of foreign exchange earnings.

I believe some domestic borrowing are included in the measurement - but I'm not sure what. I think the bulk of US external debt is measured in dollars but this might be a quirk of that the fact that it is the reserve currency. I think the IMF measures external debt to monitor things like current account deficits / capital account surpluses - the balance of payments etc. Its a clouded area it seems - there's a guide they publish which lists the components they use in determining external debt.

Given the UK external debt is 9T odd I think it's clear this relates to the banking sector - and is balanced by assets earning foreign currency. I wouldn't wager that UK Government debt is included given that it is sterling denominated. Anyone buying UK bonds is first buying sterling - and this act itself isn't a debt event. Portugal issuing US$ bonds would. But really I don't know - these are just my guestimations.

Edited by Alan B'Stard MP

Share this post


Link to post
Share on other sites

This from the CIA factbook

https://www.cia.gov/library/publications/the-world-factbook/rankorder/2186rank.html

I believe some domestic borrowing are included in the measurement - but I'm not sure what. I think the bulk of US external debt is measured in dollars but this might be a quirk of that the fact that it is the reserve currency. I think the IMF measures external debt to monitor things like current account deficits / capital account surpluses - the balance of payments etc. Its a clouded area it seems - there's a guide they publish which lists the components they use in determining external debt.

Given the UK external debt is 9T odd I think it's clear this relates to the banking sector - and is balanced by assets earning foreign currency. I wouldn't wager that UK Government debt is included given that it is sterling denominated. Anyone buying UK bonds is first buying sterling - and this act itself isn't a debt event. Portugal issuing US$ bonds would. But really I don't know - these are just my guestimations.

Thanks Alan - that's filled in a few more gaps for me.

Are there ever times when the BoE will accept foreign currency in exchange for gilts (so the BoE would then be left holding foreign reserves) or is the process always to convert into Sterling first, then buy? Either way, it is clear to see why a demand for gilts would feed a strong pound, with the reverse true, also.

I'm still left wondering why countries decide to issue bonds in other currencies, certainly when they aren't desperate for funding. Perhaps developing nations may see the reason to take the risk, but why any of the PIIGS? Won't it have caused more problems than it's solved?

Edited by Traktion

Share this post


Link to post
Share on other sites

....

One only has to see the resistance to quite modest CGT changes in the UK to see how some section of society are not prepared to yield a penny while expecting other to shoulder all the burden.

...

I agree. However, its interesting to note that many of the most vocal people who bang on about taxes don't really pay many as they are (relatively) poor. CGT is a good example. The number of people affected is very small but the number of halfwits moaning about it is huge. By moaning the idiots think they can appear to be more wealthy than they are. This type of behaviour is behind many rather illogical actions, like working class people voting Tory. The media have lied and lied and lied to ensure that the Tories got in and the poor took the sh1t that they knew was coming. But here we are not even yet at the first "emergency" budget and the tax-cutter party of the rich and pompous are putting up taxes! Its little wonder there is so much posturing. Its only a matter of time before the Torygraph and the Mail start wanting Labour back :D

Let's see if Dave keeps his word or if the scumbag wing of the party like IDS push through concessions to the boomers to ensure that once again the next generation are leaving school with a 300 grand debt bill.

Cameron is a breath of fresh air to Tory politics. I'm beginning to think he is much more likely to meet a bullet than Mr Obama. Thatcherism is dead. And not before time.

Share this post


Link to post
Share on other sites

Join the conversation

You can post now and register later. If you have an account, sign in now to post with your account.

Guest
Reply to this topic...

×   Pasted as rich text.   Paste as plain text instead

  Only 75 emoji are allowed.

×   Your link has been automatically embedded.   Display as a link instead

×   Your previous content has been restored.   Clear editor

×   You cannot paste images directly. Upload or insert images from URL.

Loading...

  • Recently Browsing   0 members

    No registered users viewing this page.

  • 140 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%



×
×
  • Create New...

Important Information

We have placed cookies on your device to help make this website better. You can adjust your cookie settings, otherwise we'll assume you're okay to continue.