This Greek thing seems to be all the rage on some blogs I could mention, but I struggle to get excited by it. According to the Grauniad website today, The IMF views a debt-to-GDP ratio above 120% as unsustainable. Here, for some context, are some recent data for a couple of countries:
I won't be offering prizes for guessing the identities of Countries A and B. One of them has a collapsing population (1 million down in the past 5y, will be dropping at a rate of 1m per year by 2030), a flatlining economy, and a skyrocketing worker-to-dependent ratio that will exceed unity by the middle of the century (and keep on getting worse). The other is Greece.
6 comments:
Does it all come down to some sort of conservative elitism, ie "those plucky Japanese will rebound -- but those lazy sod socialist Greeks will flounder?"
I admit I had to look it up as I assumed the worst scenario was the USA, but we're at about 70% (which makes the Repubs screech that all is lost - even though it's paying for their endless wars and bloated military that gets us into debt over here).
http://business.asiaone.com/news/greek-debt-crisis-how-it-affects-us
Well, there is the important factor that the Greeks are in a currency union and reliant on the EU as a whole to print their money. Japanese debts are largly in ¥ owed to themselves and they can just print as much as they want and devalue without asking anyone else about it. But the debt is no more sustainable.
>"But the debt is no more sustainable."
http://www.telegraph.co.uk/finance/economics/11539776/Japans-huge-debt-pile-just-got-scarier.html#disqus_thread
"The OECD said gross government debt, which currently stands at a record 226pc of gross domestic product (GDP), would balloon to more than 400pc by 2040 if the government did not carry out reforms.
...
With a budget deficit of around 8pc of GDP"
So far there is big appetite for government bonds from Japanese themselves. To some extent this is structural:
"banks are encouraged to hold government bonds to meet capital adequacy requirements, and insurance and pension funds may be herded toward government debt."
http://www.economist.com/blogs/freeexchange/2012/08/fiscal-sustainability
While confidence in that demand continues, it looks sustainable (provided you don't continuously run budget deficits of 8% of GDP or anything like that continuously) and as you point out they can just print more money. But is printing money really a viable option if confidence collapses as presumably it must at some point? The more money is printed, the more inflation is expected. The more inflation is expected, the more bonds lose value. The more bonds lose value, the bigger the losses the banks suffer. Meaning more government borrowing to prop up banks and the less sustainable government debt looks meaning further falls in bond values and bigger losses for banks and so on.
It seems rather unknowable when the confidence bubble will be pricked. Continue with deficits of 8% of GDP and it seems inevitable that it will happen sometime but I don't want to hazzard a guess as to when.
"70%...which makes the Repubs screech that all is lost - even though it's paying for their endless wars and bloated military that gets us into debt over here"
Seems like a silly comment. The deficit in the US has two parts: the military, and entitlement programs (Social Security, Medicare/Medicaid/Obamacare,...) Both are unaffordable, though the second is the one that's projected to completely break the budget in a decade or so as demographics shifts towards older people.
As for endless wars, the last few, including the surge in Afghanistan, were the call of a Democratic president.
In any event, just because Japan has a crazy debt ratio that is obviously unsustainable, doesn't mean that 70% isn't a bad idea. I don't think that trying to bring it down is "screeching".
Personally, I'd be in favor of turning a large part of the military costs over to the countries who use it: let Europe pay for Europe's defense, Japan pay for Japan's defense, and South Korea pay for South Korea's defense. Why should the US spend about as much on defense as the rest of the world together, kind of like an unpaid unappreciated policeman? I'd also be in favor of capping entitlements. See "Simpson-Bowles" for a real bipartisan plan to fix all this.
The issue is what is the cost of the debt going forward, if it exceeds the primary surplus than the debt cannot be serviced and grows. Devaluation is one way out of that trap (see Iceland) but that is not available in Euroland. Increasing the primary surplus by raising taxation/cutting government expenditures is a race to the bottom, shrinking the economy.
Of course, next week may be interesting
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