tag:blogger.com,1999:blog-24338064.post1598401681272490247..comments2024-02-11T19:28:27.997+11:00Comments on Personal Reflections: An economic meander - Greece, debt and economic adjustment in a QE worldJim Belshawhttp://www.blogger.com/profile/10075614280789984767noreply@blogger.comBlogger10125tag:blogger.com,1999:blog-24338064.post-68313311250232611282015-02-02T18:12:11.784+11:002015-02-02T18:12:11.784+11:00I still think that we have a maths problem, Winton...I still think that we have a maths problem, Winton. However, if we take D/Y, if D grows more in absolute terms than Y, then D increases as a proportion of Y. If D is very much smaller than Y to begin with, a larger percentage increase in D compared to Y need not lead to an increase in debt as a proportion of GDP.<br /><br />Agree with your point re spending other than interest payments, but the second part of your sentence suffers from the same problem I was alluding to.<br /><br /> Jim Belshawhttps://www.blogger.com/profile/10075614280789984767noreply@blogger.comtag:blogger.com,1999:blog-24338064.post-37598142590535619562015-02-02T14:14:06.845+11:002015-02-02T14:14:06.845+11:00Jim, on reflection, my original statement was not ...Jim, on reflection, my original statement was not quite right. It is the surplus of revenue over government spending other than interest payments that needs to rise to prevent debt from rising as a percentage of GDP if the interest rate exceeds the rate of economic growth. <br />Winton Bateshttps://www.blogger.com/profile/07383561940886657594noreply@blogger.comtag:blogger.com,1999:blog-24338064.post-37325899575893719442015-02-02T14:03:45.923+11:002015-02-02T14:03:45.923+11:00No Jim, debt will always grow as a percentage of G...No Jim, debt will always grow as a percentage of GDP if the rate of growth of debt is higher than the rate of growth of GDP.<br />It might be easier to think in terms of the ratio D/Y. If D grows more rapidly than Y, then D/Y must rise.Winton Bateshttps://www.blogger.com/profile/07383561940886657594noreply@blogger.comtag:blogger.com,1999:blog-24338064.post-8701026998956577802015-02-01T20:41:20.441+11:002015-02-01T20:41:20.441+11:00I see where you are coming from. Ignoring exchange...I see where you are coming from. Ignoring exchange rate issues, say debt is 100%of GDP and the interest rate is 4% and you are borrowing to pay that, you need GDP growth of 4% to stop debt increasing as a proportion of GDP. <br /><br />Of course, if debt is only 25% of GDP, you then you need GDP growth of 1% to stop debt growing as a proportion of GDP. Jim Belshawhttps://www.blogger.com/profile/10075614280789984767noreply@blogger.comtag:blogger.com,1999:blog-24338064.post-6042057880046997822015-02-01T18:58:21.108+11:002015-02-01T18:58:21.108+11:00Jim, unless I am mistaken, the rate of increase in...Jim, unless I am mistaken, the rate of increase in debt is equal to the interest rate if you have to borrow more to pay the interest on debt.Winton Bateshttps://www.blogger.com/profile/07383561940886657594noreply@blogger.comtag:blogger.com,1999:blog-24338064.post-2745062248702155172015-01-30T15:36:22.548+11:002015-01-30T15:36:22.548+11:00Winton, going back to your comment on rate of inte...Winton, going back to your comment on rate of interest, I am not sure that I see the validity of:<br /><br /> "Regarding government debt, some interesting dynamics come into play when the interest rate on debt is higher than rate of growth of GDP. It becomes necessary for governments to run surpluses to pay interest and to prevent debt from rising as a percentage of GDP." <br /><br />Interest payments are a current expenditure and just one item in the spend mix. To avoid absolute debt levels rising, Governments need balanced budgets, to reduce debt surpluses. So long as the rate of increase in debt itself is below the rate of increase in GDP, debt as a percentage of GDP will fall. <br /><br />Jim Belshawhttps://www.blogger.com/profile/10075614280789984767noreply@blogger.comtag:blogger.com,1999:blog-24338064.post-19063417564308303842015-01-30T00:10:44.525+11:002015-01-30T00:10:44.525+11:00Well, I get hung up about the exchange rate. Deval...Well, I get hung up about the exchange rate. Devaluation of the AUD represents a reduction in real income. Prosperous countries enjoy strong currencies. All the hype about the imagined benefits of a lower exchange rate to Australia are likely to be overblown. There is just so much structural reform that is necessary before the elasticities can come into play.<br /><br />DG Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-24338064.post-33850307960379185102015-01-29T19:29:36.089+11:002015-01-29T19:29:36.089+11:00Jim,
QE means that the government buys assets. Un...Jim, <br />QE means that the government buys assets. Unwinding QE means that the government sells those assets.<br /><br />It seems to me that there iwill only be a problem if we get wild swings in inflation expectations. That is unlikely if central banks give clear indications of their intention to promote a stable rate of growth in nominal GDP.<br /><br />We should not get hung up on exchange rate movements. Just use monetary policy to get a stable rate of growth in aggregate demand (nominal GDP) and the exchange rate will adjust appropriately.Winton Bateshttps://www.blogger.com/profile/07383561940886657594noreply@blogger.comtag:blogger.com,1999:blog-24338064.post-10763663830220851042015-01-28T19:12:51.559+11:002015-01-28T19:12:51.559+11:00On QE Winton, you have an increase in liquidity on...On QE Winton, you have an increase in liquidity on one side, an increase in Central Bank assets on the other. In buying, the CB keeps increases the value of the securities in question, thus keeping interest rates down.<br /><br />The increase in liquidity flows over into asset prices. Surplus liquidity leaves the country. The exchange rate is kept down. The process goes into reverse as QE ends.<br /><br />You might ask why any country would do this. Well, it depends on the effects of QE on the real economy. If liquidity and lower interest rates leads to more investment, if consumption goes up, if the economy expands, then unwinding becomes easier, for the negative effects of unwinding are compensated for by the need to keep activity down. To some degree, this seems to have happened in the US.<br /><br />The big difficulty globally is that we are suffering from a private sector investment strike that diminished public investment cannot offset.<br /><br />Of course other factors come into play as well. For example, countries including Greece may be able to refinance borrowings at lower interest rates, reducing budget demand. Still, its all a very uncertain process. <br /><br />On you second point, I think that your maths is wrong, but I need to think through the reasons why. Jim Belshawhttps://www.blogger.com/profile/10075614280789984767noreply@blogger.comtag:blogger.com,1999:blog-24338064.post-43018414027791188512015-01-28T10:44:05.474+11:002015-01-28T10:44:05.474+11:00Jim, I don't see exit from quantitative easing...Jim, I don't see exit from quantitative easing as a huge problem unless the strategy succeeds too well in generating expectations of inflation. Given the reputation of the ECB for keeping inflation low, it seem likely that they will be cautious in their use of QE.<br /><br />Regarding government debt, some interesting dynamics come into play when the interest rate on debt is higher than rate of growth of GDP. It becomes necessary for governments to run surpluses to pay interest and to prevent debt from rising as a percentage of GDP. Life will might get tougher in a lot more countries as interest rates on governements debt return to more normal levels.Winton Bateshttps://www.blogger.com/profile/07383561940886657594noreply@blogger.com