Jump to content
House Price Crash Forum
Sign in to follow this  
R K

Britain Can Afford To Live With High Debt Forever, Says Imf

Recommended Posts

http://www.telegraph.co.uk/finance/economics/11644471/Britain-can-afford-to-live-with-high-debt-forever-says-IMF.html

Living with high debt may be the "optimal policy" for countries such as the UK, Germany and the US, according to IMF economists

George Osborne's obsession with reducing Britain's debt mountain may do more harm than good, research by the International Monetary Fund (IMF) has suggested.

ADVERTISING

While advanced nations are facing some of the highest debt ratios since World War II, IMF economists cited research by Moody's Analytics that suggested countries such as the UK, US and Canada could afford to live "forever" with relatively high debt shares compared with their pre-crisis averages.

The IMF paper, which was authorised by Olivier Blanchard, the Fund's chief economist, showed that while countries such as Greece, Cyprus, Italy and Japan had a pressing need to reduce their debt ratios because of the risk that a financial shock could leave them shut out of the market, others such as Norway, Germany and the UK were deemed to be in the "safe zone", where fiscal space was ample and borrowing costs were low.

In countries such as the UK and Norway which controlled their own monetary policy, the advantages were even bigger, the authors said.

For these countries, the IMF said the "optimal" policy involved "living with high debt pile". While the Fund said this was far from ideal, it was preferable to introducing "policies to deliberately pay down the debt" because the costs were likely to outweigh the benefits.

"When a country runs a budget surplus to pay down its debt, there is no free lunch, the money has to come from somewhere," said Jonathan Ostry, co-author of the report. "Either through higher taxes, which undercuts the productivity of labour and capital, or lower spending which - unless that spending is completely wasteful - has a similar effect.

"Advocates of ‘fixing the debt problem’ stress that the crisis insurance benefit of lower debt without mentioning the upfront cost of the insurance. Our paper shows that insurance can be expensive.

"More importantly, for countries that have ample fiscal space, the cost of insurance is likely to be much larger than the benefit. It is much better in these circumstances to just live with the debt, allowing the debt ratio to be reduced organically through higher growth."

The IMF said that countries with ample fiscal space should focus on beefing-up infrastructure, where the rewards could be big. "For countries with low debt and big infrastructure needs (and with idle resources and facing low interest rates), building infrastructure should be the greater priority. For countries with significant risk of fiscal distress, it is unlikely that they could afford to take the chance of going on a borrowing spree, no matter how large the public investment," the report said.

So its official. There is no debt crisis. Tories have been barking up the wrong tree.

Share this post


Link to post
Share on other sites

They are just worried that their banking cartel might lose their monopoly! One day people might realise that money can be created without debt!

Can't be having that now, keep on increasing that debt pile! :P

Share this post


Link to post
Share on other sites

If they really believed that why are they worried about Greece.

They really just want to make sure that their colleagues in the banking sector can continue sucking a living from society.

Share this post


Link to post
Share on other sites

There is some technical argument to this though.

In a balanced budget lets say the government tax is £100, government spending is £100. Net income = zero.

If the government were to spend £120, it would need to tax £120, taking £20 out of the private sector.

Alternatively if the government still taxes £100 and borrows £20 from the private sector, then the extra £20 coming out of the private sector becomes an asset, essentially savings.

(G – T) = (S – I)

Government spending - Tax = Private Savings + Private investment.

So what a budget deficit does is increase private sector assets.

Budget Deficit = Net Private Saving

If a government runs a budget surplus its essentially taxing more than it spends, in which case why do you want the government to take money out your pocket and sit on your money, surely its better off in your pocket.

Im not saying its some kind of perfect model, it can also fall apart if debt is too high, but its just that there is some logic to the model.

If a government borrows money from its own citizens (unlike greece who borrowed from abroad), it creates and asset for the private sector to move around and spend, like an expansion of the money supply, but in this case an expansion of assets.

Share this post


Link to post
Share on other sites

Given sovereign defaults, currency crises and the like happen all the time - including in the post Nixon economic paradigm - I'm not sure how on earth they can say that.

Share this post


Link to post
Share on other sites

If they really believed that why are they worried about Greece.

They really just want to make sure that their colleagues in the banking sector can continue sucking a living from society.

Greece isnt a sovereign nation with a central bank. Its just an administered province of Greater Deutscheland. So they have no monetary policy and no fiscal policy to speak of.

IMF has also accepted its initial policy on Greece was flawed and their forecast of 5% fall in output has turned into a 25% depression. They recognise Greece needs growth not austerity. hence the divergence with Germany.

Share this post


Link to post
Share on other sites

Often people think budget deficit = bad, budget surplus = good, but is not as simple as that.

But under a budget surplus, why would you want a government to over tax you. The government is essentially taking in more money out of your pocket than what it needs to spend.

Share this post


Link to post
Share on other sites

If they really believed that why are they worried about Greece.

They really just want to make sure that their colleagues in the banking sector can continue sucking a living from society.

Because (explained simply on here literally hundreds of times) Greek debt is not denominated in a currency that they can print. Greek debt is much more like personal debt in that respect.

Public debt is just an accounting issue. TBH if you can print stuff on bits of paper and give them to foreigners in exchange for useful stuff like food why the hell wouldn't you ?

The answer to that is just as simple. The reason you wouldn't is because it might lead to some short term destabilisation of the currency, which would affect not only the holders of the debt, but also your own population. Markets tend to correct in leaps and bounds, whereas people prefer gradual changes (at least when things are going down anyway).

So that begs the question what is an amount of debt that is consistent with no destabilisation of the currency, and in my view, the answer to that is the same amount of debt that every other country of a similar background has. ie the same debt levels as the US, Japan, germany, france etc. Provided out debt remains broadly conistent with what these guys have it doesn't matter how high it is. The moment it becomes stand out though is the moment to start becoming concerned.

Share this post


Link to post
Share on other sites

Public debt is just an accounting issue. TBH if you can print stuff on bits of paper and give them to foreigners in exchange for useful stuff like food why the hell wouldn't you ?

They aren't just bits of paper though, they are IOUs on the products and assets of the issuing nation... if a central bank prints a shedload of £ and gives it to China, then it means China has a claim on the products and assets of the average British pleb. Who might not even have derived any benefit from the printing.

Share this post


Link to post
Share on other sites

If they really believed that why are they worried about Greece.

They really just want to make sure that their colleagues in the banking sector can continue sucking a living from society.

+1

The latest IMF opinion and the benefits of controlling your own currency seems to be one of the best justifications being made for a Greek exit from the euro. Most other countries as well.

In fact the IMF's latest (apparent) stance on austerity suggests that large currency blocks aren't advantageous to most countries economies (or even the world's economy) after all.

Edited by billybong

Share this post


Link to post
Share on other sites

It's the debt interest which is the killer. Why use up taxpayers' money to pay interest on debt? If there was no debt the tax money would stretch much further. Taxes could come down for the same level of services. Now there's a thought.

Share this post


Link to post
Share on other sites

More like, any other options are just too bad to even think about?

Well I suppose if other options are de facto less *optimal* why on earth would you pursue them?

Share this post


Link to post
Share on other sites

It's the debt interest which is the killer. Why use up taxpayers' money to pay interest on debt? If there was no debt the tax money would stretch much further. Taxes could come down for the same level of services. Now there's a thought.

Yes but Osborne is only concerned about public debt

The government seems qyuite happy for the populace to take on more private debt which is also incurrs interest often at a much higher rate than public debt

One thing the financial crisis of 2008 should have taught everyone is that the distinction between private and publc indebtedness is a fiction and that when the sh*t hits the banking system the two classes of debt become interchangeable very quickly

Spain and Portugal are two countries that got caught out by this situation

http://www.nytimes.com/roomfordebate/2012/02/14/what-went-wrong-in-portugal/private-debt-becomes-public-debt

Share this post


Link to post
Share on other sites

IMF makes sense to me. If the money is borrowed from savers that will never ever spend then it will never ever have to be paid back.

Share this post


Link to post
Share on other sites

It's the debt interest which is the killer. Why use up taxpayers' money to pay interest on debt? If there was no debt the tax money would stretch much further. Taxes could come down for the same level of services. Now there's a thought.

Well that depends on the real interest rate (currently low/negative) and the cost of cutting the debt.

So, cutting the debt requires higher taxes today (or reduction in govt. spending which has the same effect). What the IMF are saying is that if this cost is higher than the cost of not reducing the debt, because there is no need to, then it is optimal to leave the debt where it is (or reduce it over a much longer timeframe, say 50 years+).

Osborner (and for that matter, Libdem and Labour) desperation to cut debt/gdp asap by slashing spending is thus both unnecessary and more costly than not doing so. Thus it's bad policy economically (it may be good policy if it satisfies some irrational political agenda of course, which seems to be the only reason for doing it)

Share this post


Link to post
Share on other sites

Create an account or sign in to comment

You need to be a member in order to leave a comment

Create an account

Sign up for a new account in our community. It's easy!

Register a new account

Sign in

Already have an account? Sign in here.

Sign In Now
Sign in to follow this  

  • Recently Browsing   0 members

    No registered users viewing this page.

  • Next General Election   92 members have voted

    1. 1. When do you predict the next general election will be held?


      • 2019
      • 2020
      • 2021
      • 2022

    Please sign in or register to vote in this poll. View topic


×

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.