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Caveat Creditor As Imf Chiefs Mull Unpayable Debts

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http://www.imf.org/external/mmedia/view.aspx?vid=4176839368001

The Managing Director’s Global Policy Agenda Spring 2015

April 16, 2015

The Global Policy Agenda, presented to the International Monetary and Financial Committee of the IMF, outlines policy priorities for the next six months to lift growth and address global and national challenges.

http://www.telegraph.co.uk/finance/economics/11548318/Caveat-creditor-as-IMF-chiefs-mull-unpayable-debts.html

The International Monetary Fund has sounded the alarm on the exorbitant levels of debt across the world, this time literally.

The theme trailer to its fiscal forum on the 'political economy of high debt' plays on our fears with the haunting tension of a Hitchcock thriller. A quote from Thomas Jefferson flashes across the screen in blood-red colours: "We must not let our rulers load us with perpetual debt."

We learn that public debt in the rich economies fell from 124pc of GDP at the end of Second World War to 29pc in 1973, a dream era that we have left behind.

The debt burden has since climbed at a compound rate of 2pc a year, accelerating into an upward spiral to 105pc of GDP after the Lehman crash. It is as if we had fought another world war.

A baby boom and surging work-force enabled us to grow out of debt in the 1950s and 1960s without noticing it. No such outcome looks plausible today.

Still I'm sure the magic fairies will find a solution. The only way to pay off the debt is with more debt, but the stupidity of this appears to be causing a few conceptual issues..

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Torygraph revisionist bonkers alert:

A baby boom and surging work-force enabled us to grow out of debt in the 1950s and 1960s without noticing it. No such outcome looks plausible today.

Cute, except for the fact we never 'grew out of the debt', we simply transferred it from public sector to private sector...and already by the late 70s it was increasing in the public sector again. No such luck this time...both the private and public sector are saturated in debt.

I dont see why they think the baby boom in the 50s and 60s would have powered growth then anyway. Boomers didnt start entering the workforce and adding productivity until the very end of that period. Indeed, Germany actually had virtually no baby boom and some of the best growth figures of the 50s and 60s.

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The implicit assumption appears to be that it is a "problem". Presumably because the word used is "debt" rather than "savings".

"Unrepayable savings" doesnt have quite the same cachet or perhaps it does?

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http://www.imf.org/external/mmedia/view.aspx?vid=4176839368001

The Managing Director’s Global Policy Agenda Spring 2015

April 16, 2015

The Global Policy Agenda, presented to the International Monetary and Financial Committee of the IMF, outlines policy priorities for the next six months to lift growth and address global and national challenges.

http://www.telegraph.co.uk/finance/economics/11548318/Caveat-creditor-as-IMF-chiefs-mull-unpayable-debts.html

Still I'm sure the magic fairies will find a solution. The only way to pay off the debt is with more debt, but the stupidity of this appears to be causing a few conceptual issues..

no, the only way to pay off debt is to round the dealers up and turn them into human collateral.

you do not cure an alcoholic by offering them more drink.

if the publican has been irresponsible offering more booze to the drunkard, he can have his/her licence revoked can he not?

Edited by oracle

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A baby boom and surging work-force enabled us to grow out of debt in the 1950s and 1960s without noticing it. No such outcome looks plausible today.

"Without noticing it" :o

It's a bit selective in that it doesn't take into account the massive changes that were gaining momentum and taking place regarding the overall circumstance of Britain after the war partly due to the debt accumulated over two world wars - such as disentanglement from the British Empire.

In terms of austerity rationing didn't end until about 1954.

Edited by billybong

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The implicit assumption appears to be that it is a "problem". Presumably because the word used is "debt" rather than "savings".

"Unrepayable savings" doesnt have quite the same cachet or perhaps it does?

Collateralised Debt Obligations were the biggest part of the problem.

The Debt Management Office is the executive agency charged with issuing UK Gilts to repair the hole in the nation's finances made by the City of London's criminally irresponsible CDO traders.

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Collateralised Debt Obligations were the biggest part of the problem.

The Debt Management Office is the executive agency charged with issuing UK Gilts to repair the hole in the nation's finances made by the City of London's criminally irresponsible CDO traders.

CDOs were savings too. Or turned out not to be ex-post.

The DMO are mainly charged with issuing debt i.e. somewhere to park excess savings due to the fall in output caused by the recession caused by the collapse of RBS. I'd agree with that.

UK debt still represents savings though, no? Mostly pension funds, insurance funds and banks on behalf of their clients, but also foreign governments on behalf of theirs.

If a pension fund invests their clients' pensions in UK gilts what is it if not savings?

Edited by R K

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CDOs were savings too. Or turned out not to be ex-post.

The DMO are mainly charged with issuing debt i.e. somewhere to park excess savings due to the fall in output caused by the recession caused by the collapse of RBS. I'd agree with that.

UK debt still represents savings though, no? Mostly pension funds, insurance funds and banks on behalf of their clients, but also foreign governments on behalf of theirs.

If a pension fund invests their clients' pensions in UK gilts what is it if not savings?

Yes, one person's debt is another person's credit, but can't just group in all saving/debt instruments as one.

Mortgage CDOs, retail bonds paying 5%+, BTL funding instruments advertised in newspaper... are not Treasury Bonds/Gilts. I'd argue BoE (etc) got an interest in maintaining the value of its own Gilt holding. Some creditors/savers will go under if they're in higher risk 'savings' that prove unrepayable. I'm calm about my savings in a few bank accounts, expecting the homeowner side to take an epic value crash. If you want safety for your savings.. if you have any... then you position into higher quality savings instruments.

Deflationary depression would write down the value of the tangible assets that are the collateral for many loans in the banking system, but it would increase the value of sound financial assets, including the value of government debt. Deflationary depression would expose social conflicts papered over by welfare state spending.

The major economic drama will be the struggle between the market and government over the liquidation of debt. Political authorities will prefer to wipe away debt surreptitiously through inflation. But to inflate away bad debts also means inflating away good credits. Market participants will seek to preserve the value of their assets denominated in money. To the extent they succeed, they will make it harder to repay excessive debt in cheap money, and thus make the system more vulnerable to overt default and deflation. As monetary policy is loosened, in increasingly desperate efforts to reliquify the economy, the market may force a deflationary response.

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The implicit assumption appears to be that it is a "problem". Presumably because the word used is "debt" rather than "savings".

"Unrepayable savings" doesnt have quite the same cachet or perhaps it does?

oh boy! econ 101, the difference between debt and savings.

savings are a hoard of the most liquid commodity, usually called money. Savings are commodities that have already been produced.

debt is a claim on future production of commodities.

The problem is that because debt is a future claim on commodities, debt issued tends to eventually exceed the capacity in the economy to either service it or deliver in it. Then you have a default and a crash. The higher the debt to future production potential , the bigger the crash.

Savings are governed by rates and when demand for investment loans is weak rates fall until it becomes attractive to move savings into investment. And when investment demand overheats and rates rise high enough, saving become attractive again.

If course, in our through the looking glass world demand and supply are rigged, rates are rigged, money supply is rigged and this confuses the hell out of guys like R.K. They think this is normality and they make up economic theory based on a bogus premise, until they become so contorted they don't know demand from supply anymore.

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Yes, one person's debt is another person's credit, but can't just group in all saving/debt instruments as one...

Debt and credit net out, neither ultimately counts as saving:

Global imbalances and the financial crisis: Link or no link?

The misleading focus on current accounts arguably reflects the failure to distinguish sufficiently clearly between saving and financing. Saving, as defined in the national accounts, is simply income (output) not consumed; financing, a cash-flow concept, is access to purchasing power in the form of an accepted settlement medium (money), including through borrowing. Investment, and expenditures more generally, require financing, not saving. The financial crisis reflected disruptions in financing channels, in borrowing and lending patterns, about which saving and investment flows are largely silent.

[. . .] Saving, defined as income not consumed, is a national accounts construct that traces the use of real production. It does not represent the availability of financing to fund expenditures. By construction, it simply captures the contribution that expenditures other than consumption make to income (output) [. . .] Because saving and investment are the mirror image of each other, it is misleading to say that saving is needed to finance investment. In ex post terms, being simply the outcome of various forms of expenditure, saving does not represent the constraint on how much agents are able to spend ex ante [. . .] The true constraint on expenditures is not saving, but financing. In a monetary economy, all financing takes the form of the exchange of goods and services for money (settlement medium) or credit (IOUs). Financing is a cash-flow concept.

[. . .] investment, and hence saving in the national income accounting sense, may be zero, but as long as production and the associated expenditures are positive, they have to be financed somehow. This is an economy in which saving is zero but financing positive. In the process, expenditures and production may be underpinned by substantial borrowing and lending [. . .] more generally, the change in financial assets and liabilities in any given period bears no relationship to saving (and investment) in the national accounts sense. The same volume of saving can go hand-in-hand with widely different changes in financial assets and liabilities. [. . .] And, by construction, those changes net out to zero: what is issued by one sector must be held by another. Typically, increases in assets and liabilities greatly exceed saving in any given period, reflecting in part the myriad of ways in which expenditures are ultimately financed.

For example, just one such component – the outstanding stock of credit to the private sector – tends to grow faster than GDP. In other words, its change is much larger than saving, which is only one part of income [. . .] By the same token, the popular and powerful image that additional saving bids up financial asset prices (and hence depresses yields and interest rates) because it “has to be allocated somewhere” is misleading. There is no such thing as a “wall of saving” in the aggregate. Saving is not a wall, but a “hole” in aggregate spending.

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