Saturday, February 12, 2011

The Future of Public Debt? (Sexy!) & the "Plutocrap Thunderdome"

Just kiddin' about the sex.


Although I will suggest that Drifty has aplenty (usually) and quite a bit of exposure for the daily DFB diatribe against his lessers (in the "Plutocrap Thunderdome").

As I believe I've mentioned many times before, I want to provide a site that embraces all types of economic and financial commentary (although idiots are always banned), not that I don't have my favorites, of course. John Mauldin is a fairly well-respected member of this fraternity and he has been warning about the long-term effects of the public debt we've incurred (the vast majority of it not from entitlements (really previous taxes paid for guaranteed benefits), but from the war spending and tax cuts beginning with those by the Raygun/Weinberger (who had to be pardoned for his part in the sale-to-Iran-of-arms-in-order-to-illegally-fund-the-Contras) troops in 1981 and continuing through the Bushes to the present day ones demanded by the Rethugs in Congress, who extract them as gateways to any type of meaningful reform of the past financial catastrophes caused by their candidates).

The question that should be screaming at us daily (from my vantage point) is how to reduce the public debt fairly, not that it must be shoved as usual onto the shoulders of the people at the lowest rungs of the economic pyramid while those at the top continue on their merry way. Here's a link for an excerpt from his next book: Endgame, which you may find interesting. His essay which follows has more than a little bit of interest for US (emphasis marks and some editing inserted - Ed.).

The Future of Public Debt John Mauldin February 11, 2011 This week I find myself in Bangkok, and I must admit to enjoying the experience a great deal, so much so that I am going to preview a portion of my coming book, Endgame, so that I can go back out and play tourist.

Next week I get back to my more or less regular schedule, but I think you will enjoy this first portion of Chapter Six, where we look at an important paper from the Bank of International Settlements on “The Future of Public Debt.”

It is not a pretty one. We are watching one of the last great bubbles begin to deflate – the bubble of government and government debt – all over the developed world.

This is a serious weight that will be a drag on our growth, and it is interesting to contemplate as I sit in Bangkok, a city that is vibrant and teeming with opportunity.

Endgame will be in the bookstores in a few weeks, but let me once again ask you to not pre-order the book from Amazon or online. Pre-order books do not get into the book sales numbers (long story and more information than you want to know). I encourage you to pre-order from your local book store if you have one. Let me note that in the portion below, the pronoun we is used a lot. It is not the royal we – I do have a co-author, Jonathan Tepper, and this book has very much been a collaboration.

. . . Our argument in Endgame is that while the debt supercycle is still growing on the back of increasing government debt, there is an end to that process, and we are fast approaching it. It is a world where not only will expanding government spending have to be brought under control but also it will actually have to be reduced.

In this chapter, we will look at a crucial report, “The Future of Public Debt: Prospects and Implications,” by Stephen G. Cecchetti, M. S. Mohanty, and Fabrizio Zampolli, published by the Bank of International Settlements (BIS).

The BIS is often thought of as the central banker to central banks. It does not have much formal power, but it is highly influential and has an esteemed track record; after all, it was one of the few international bodies that consistently warned about the dangers of excessive leverage and extremes in credit growth.

Although the BIS is quite conservative by its nature, the material covered in this paper is startling to those who read what are normally very academic and dense journals. Specifically, it looks at fiscal policy in a number of countries and, when combined with the implications of age-related spending (public pensions and health care), determines where levels of debt in terms of GDP are going.

Throughout this chapter, we are going to quote extensively from the paper, as we let the authors’ words speak for themselves. We’ll also add some of our own color and explanation as needed. (Please note that all emphasis in bold is our editorial license and that we have chosen to retain the original paper’s British spelling of certain words.)

After we look at the BIS paper, we will also look at the issues it raises and the implications for public debt. If public debt is unsustainable and the burden on government budgets is too great, what does this mean for government bonds? The inescapable conclusion is that government bonds currently are a Ponzi scheme.

Governments lack the ability to reduce debt levels meaningfully, given current commitments. Because of this, we are likely to see “financial oppression,” whereby governments will use a variety of means to force investors to buy government bonds even as governments actively work to erode their real value. It doesn’t make for pretty reading, but let’s jump right in.

A Bit of Background

But before we start, let’s explain a few of the terms the BIS will use. They can sound complicated, but they’re not that hard to understand. There is a big difference between the cyclical versus structural deficit. The total deficit is the structural plus cyclical.

Governments tax and spend every year, but in the good years, they collect more in taxes than in the bad years. In the good years, they typically spend less than in the bad years. That is because spending on unemployment insurance, for example, is something the government does to soften the effects of a downturn.

At the lowest point in the business cycle, there is a high level of unemployment. This means that tax revenues are low and spending is high. On the other hand, at the peak of the cycle, unemployment is low, and businesses are making money, so everyone pays more in taxes.

The additional borrowing required at the low point of the cycle is the cyclical deficit.The structural deficit is the deficit that remains across the business cycle, because the general level of government spending exceeds the level of taxes that are collected. This shortfall is present regardless of whether there is a recession.

Now let’s throw out another term. The primary balance of government spending is related to the structural and cyclical deficits. The primary balance is when total government expenditures, except for interest payments on the debt, equal total government revenues. The crucial wrinkle here is interest payments.

If your interest rate is going up faster than the economy is growing, your total debt level will increase.The best way to think about governments is to compare them to a household with a mortgage. A big mortgage is easier to pay down with lower monthly mortgage payments. If your mortgage payments are going up faster than your income, your debt level will only grow.

For countries, it is the same. The point of no return for countries is when interest rates are rising faster than their growth rates. At that stage, there is no hope of stabilizing the deficit. This is the situation many countries in the developed world now find themselves in.

Drastic Measures

“Our projections of public debt ratios lead us to conclude that the path pursued by fiscal authorities in a number of industrial countries is unsustainable. Drastic measures are necessary to check the rapid growth of current and future liabilities of governments and reduce their adverse consequences for long-term growth and monetary stability.”

“Drastic measures” is not language you typically see in an economic paper from the Bank for International Settlements. But the picture painted in a very concise and well-written report by the BIS for 12 countries they cover is one for which the words drastic measures are well warranted.

Okay, okay. I know you're prolly bored by now, but do read the whole essay as I can't imagine not needing to know what the BIS' plans are. For your own personal financial protection. Well, how about that?

Breathe deeply - meditate if you like and think!

And being that it's the weekend, how about a little jazzy Feat? To make us feel just a little bit better. And, no, I'm not willin' to let these scoundrels continue to triumph. ______________________


rjs said...

hey, when did you become the Ex-Wiz?

did i miss something?

The Ex-Wiz said...

I guess I'm just so out of it that I'm no longer pretending to be much of anything - let alone a wizard as I cannot find a job or much money at all in order to continue any real efforts of value.

Sorry to be so down, but there it is.

I had some hope of something coming through for almost half a year, but it looks like the spate of job opps are mainly for the young (or some other designation that I no longer share).

So, no waaah. Just

The ex-Wiz

The Ex-Wiz said...

Thanks for asking!


rjs said...

that's depressing, suzan...

i wish i had a solution for you and all the others who have fallen thru the cracks, but it seems like we're all dancing to a one step forward, two steps back dance...

The Ex-Wiz said...

Me too, sweetie.

But I'm not expecting any. It will takes years - and some of us will not make it.

Thanks for caring.