Sovereign debt bubble thread

[DGuller]

There is definitely a lot to be said for being counter-cyclical with the budgets, and that few governments have the foresight to do it.  However, the fundamental reality is that the neutral point of sustainability is not a zero percent deficit, so to say that you obviously can't run sustainable deficits forever is mathematically false.

[Zanza]

There is definitely a lot to be said for being counter-cyclical with the budgets, and that few governments have the foresight to do it.  However, the fundamental reality is that the neutral point of sustainability is not a zero percent deficit, so to say that you obviously can't run sustainable deficits forever is mathematically false.

If you accept the premise that resources are finite, you can't grow an economy forever and thus can't run a sustainable deficit forever either.

[The Minsky Moment]

If you accept the premise that resources are finite,

False premise.

[DGuller]

There is definitely a lot to be said for being counter-cyclical with the budgets, and that few governments have the foresight to do it.  However, the fundamental reality is that the neutral point of sustainability is not a zero percent deficit, so to say that you obviously can't run sustainable deficits forever is mathematically false.

If you accept the premise that resources are finite, you can't grow an economy forever and thus can't run a sustainable deficit forever either.

If resources are finite, then the whole economic theory goes out the window.  Sustainable deficits would be the least of the worries.

[DGuller]

If you accept the premise that resources are finite,

False premise.

I don't think this premise is either true or false, it's one of those premises that's somewhere in the middle.  Some very key resources, like water, are limited, so sooner or later that limitation has to manifest itself somehow.

[MadImmortalMan]

Even if it were probable that economic conditions could support continual deficit spending for more than several decades straight, why would you consider it wise to do so? I mean, there are definitely reasons to support doing it for a while, maybe even extended periods, but not indefinitely. Eventually, the wall must be hit. Investor confidence in the bond market is subject to whim, and putting ourselves at the mercy of such a fickle master can't be a good thing. I mean borrowing to cover operating expenses rather than one-time shots like buying a bridge. Once we are using new debt issuance to cover operations, it's too far imo.

[alfred russel]

Even if it were probable that economic conditions could support continual deficit spending for more than several decades straight,

I think it can for centuries, not just decades.

[MadImmortalMan]

I think it can for centuries, not just decades.

Then why has every attempt to do so resulted in some sort of default?

Eventually there's a big war or something.

[alfred russel]

I think it can for centuries, not just decades.

Then why has every attempt to do so resulted in some sort of default?

Eventually there's a big war or something.

Look at the UK or the US. Yes both have run supluses for a few years here or there, but the overwhelming trend is deficit spending.

In real terms, if you have 3% inflation, you have reduced your debt by 3%. You can increase your debt by that amount without increasing the real debt burden. Increases in hours worked due to population growth and improvements in productivity also make sustaining debt easier.

[MadImmortalMan]

I do understand the inflation-weighted debt accrual thesis. I would go so far as to change the definition of a balanced budget to one which borrows less than the inflation rate. For non-recurring expenditures.


The problem is, why hasn't someone been able to do it for a couple centuries straight? They always wind up defaulting on it or wiping it out with a period of very high inflation or some other form of default. My guess is that externalities jump in and change the equation. Suddenly that inflation rate isn't what they expected it to be, or Nappy invades, or the English king decides he's inherited your throne or something. Yes it works. Sometimes for a really long time. But not forever.

[alfred russel]

I do understand the inflation-weighted debt accrual thesis. I would go so far as to change the definition of a balanced budget to one which borrows less than the inflation rate. For non-recurring expenditures.


The problem is, why hasn't someone been able to do it for a couple centuries straight? They always wind up defaulting on it or wiping it out with a period of very high inflation or some other form of default. My guess is that externalities jump in and change the equation. Suddenly that inflation rate isn't what they expected it to be, or Nappy invades, or the English king decides he's inherited your throne or something. Yes it works. Sometimes for a really long time. But not forever.

I don't think it is so much a thesis as math.

However, how many countries haven't defaulted for a couple of centuries? If you start with that, you will have a very small list of countries. It is quite a burden to hold them to a requirement to never run a surplus in any year, because that is several hundred years of budgeting. But certainly the US has typicaly run a deficit and is still okay.

[Sheilbh]

You guys should all feel sorry for us. 

I've sympathy for what he's saying though you need to look past the Daily Telegraph house style to get there.

I think one of the aspects that must be really difficult for Germany and especially her leaders is the psychiatric wrench required to lead Europe.  It seems that that could be more challenging than using military force in Kosovo.  I always suspect that this is part of the reason Merkel's brought the Franco-German engine back at this moment.

I worry the markets are far too hopeful ahead of this week.  It seems that even a slight disappointment could send them mad.  But I think their hopes seem so high that a few slight disappointments seem possible. 

I don't think the ECB will start bond purchases on Thursday (or know how their sterilisation auction will go tomorrow).  I'm not convinced that the fiscal union plans will be sufficiently detailed or plausible when they're released.  I still don't think the EFSF's large enough and I don't think we'll see any movement on Eurobonds whether in the form the Commission's suggested or the bond idea Germany's wise men have floated.  This feels like a weird situation of politicians possibly managing to solve the long-term problems but completely avoiding the short-term.

Nomura released this today which is interesting, if it all fell apart:


Edit:  And S&P have put the Eurozone's six AAA nations on creditwatch.  That's France, Germany, Netherlands, Austria, Luxembourg and Finland.  I do wonder how they've any credibility but it's a warning I suppose.

[alfred russel]

Sheilbh, another point of view is that they need to solve the long term in order to credibly backstop Italy (and/or Spain). Unless there is a strong mechanism to prevent another debt crisis, a backstop would just create a big moral hazard problem that could doom the eurozone to lots of future crises.

[Zanza]

So does that mean that the external value of the Euro is almost exclusively based on Germany at the moment? Shouldn't the value be lower now?

If Germany's currency appreciates a mere 1.3% versus the rest of the world, our trade with the rest of the world shouldn't be affected that much. The adjustment within the EU is of course harsh, but at 7-9% with our main trading partners it doesn't seem that terrible. Predictions by the USB for example were much worse.

[Sheilbh]

Sheilbh, another point of view is that they need to solve the long term in order to credibly backstop Italy (and/or Spain). Unless there is a strong mechanism to prevent another debt crisis, a backstop would just create a big moral hazard problem that could doom the eurozone to lots of future crises.

I entirely agree, I don't oppose this or austerity plans.  My view is that this needs everything: a credible fiscal union plan (the long-term); some form of Eurobond, a strong, large EFSF and ECB bond purchases, interest rate cuts and support for banks (the short-term guarantee); and credible austerity and growth plans in the debtor countries - especially Spain and Italy.

I think we may not get the credible fiscal union plan.  The difference between Sarko and Merkel's views are quite important and none of the ideas I've seen, even that suggested by Merkel, seem to be going far enough beoynd a reheated Stability and Growth Pact.  None of these plans seem to acknowledge that there will be difficulty with treaty negotiations and approvals and that it'll take months for that process to work.  In addition I don't see how these plans meet what Zanza said was the German Constitutional Court's view on ceding more sovereignty.  None of the plans seem to be strengthening the position of the Bundestag or increasing the democratic oversight within Europe.  I think those problems are why there's so much focus on it but that's also where there's a lot of danger and I fear we'll get the standard 4am Euro-summit fudge that gets everyone excited until they realise there's no small print.

The short-term stuff I don't think'll necessarily happen.  I think Draghi's speech to the EU Parliament suggested bond purchases if there's a plan to fiscal union so it may be depending on that - but the interest rate decision's on Thursday and I think the ECB have to give everyone a hint that they're willing to print.  I'm simply not convinced on the EFSF or Eurobonds, but again I think we need a big statement on them ideally at the summit.

I think Monti and Rajoy should be able to present and pass bold plans. That bit is the bit I'm most confident of.