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Of Debt, Growth, Interest Rates And History

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http://www.bloomberg.com/news/2013-11-05/of-debt-growth-interest-rates-and-history.html

The blog of New York Times columnist Paul Krugman recently featured a chart plotting the U.K.’s ratio of government debt to gross domestic product against the nominal yield on long-term government bonds from about 1700 to the present. See Figure 1.

iZuYSFVRsKMk.jpg

The chart appeared with this comment:

“You might think that these data, and the relationship they show -- or, actually, don’t show -- should have some impact on our current debate, especially given the tendency of many players to reject modeling and appeal to what they claim are the lessons of history. Or are they claiming that this time is different?”

It’s hard to be sure, but Krugman appears to be saying -- again -- that there’s no reason to fear that high levels of public debt might inhibit growth. The chart shows that the U.K., in the 19th century, had both high levels of debt and low-and-stable nominal interest rates. So, the message seems to be, why worry about debt? Why bother to dig any deeper?

Because the chart, interesting though it is, doesn’t get you far in understanding this issue.

To begin with, in judging the connection between debt and growth, it’s real interest rates (nominal interest rates minus inflation) that matter. If low nominal interest rates were the ticket to economic prosperity, then the Great Depression of the 1930s was a boom. Nominal interest rates in the U.S. hovered around zero during much of that decade -- while severe deflation yielded some of the highest real interest rates in U.S. history.

More at the link.

Not mentioned in the article is also the fact the UK was still a "growing" economy we now appear to be a mature economy with decreased growth rates meaning a large growth of debt could become crippling in the long term. Unless of course a new growth paradigm is found.

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Does it matter what the UK's debt/GDP ratio was 100's of years ago when there was the British Empire and the UK was taxing money from all over the world?

What matters now, today is how the UK's debt/GDP ratio compares to other countries today and how much risk there is of defaulting either outright or by inflation - hence bond prices.

It's like looking at a 200 year old house price chart and saying that prices only go up - it's kind of irrelevant.

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We have both high levels of public debt and high levels of private debt. In aggregate, the two have never been higher. Krugman's position only makes sense if you believe that private debt is unimportant, merely a transfer of wealth from one party to another. The Neoclassical synthesis to which Krugman subscribes errantly proposes that this is indeed the case.

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Exactly. Public debt is a lessor issue. The biggest issue is private debt which is a function of imbalanced trade between economic entities and thereby inequality.

We have no trade rules nor fiscal response to tackling this issue and so we're heading blindly to the next crisis.

You let public debt rise whilst private sector is deleveraging.

Simples. Unless you're a Tory chancellor, then you c0ck the whole thing up.

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The same Krugman who berated the Bush-Cheney deficits in the early 00s as immoral.

http://www.creators.com/opinion/larry-elder/krugman-bush-s-deficit-bad-obama-s-deficit-good.html

He NEVER mentions private debt. Steve Keen called him out on this.

How can you claim to understand the debt problem when you ignore the 4/5ths+ of it that isnt government debt?

Id rather read an economics column by Gordon Brown to be honest. Krugman played his cards when he said during the Ron Paul interview he'd accept defeat when govt spending had reached 50% of GDP and the economy wasnt fixed (France and others are already there and not 'fixed')

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You let public debt rise whilst private sector is deleveraging.

Simples. Unless you're a Tory chancellor, then you c0ck the whole thing up.

What evidence is there that the private sector has in any meaningful way deleveraged?

(It did for a short time, but even then, the public sector was adding debt faster than the private was reducing it)

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What evidence is there that the private sector has in any meaningful way deleveraged?

(It did for a short time, but even then, the public sector was adding debt faster than the private was reducing it)

The take away from Japan is that debt substitution isn't in any way 'simples'. Public sector debt creation interferes with and continuously discourages private sector deleveraging - potentially leading to the zombiefication of the entire economy.

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