tag:blogger.com,1999:blog-1513588060557517621.post7980452940330191055..comments2023-03-22T12:40:49.113+01:00Comments on Notes on the Next Bust: The government must run deficits, even in good times.Ari Andricopouloshttp://www.blogger.com/profile/00181838814176635218noreply@blogger.comBlogger15125tag:blogger.com,1999:blog-1513588060557517621.post-56315586189494223382016-03-29T08:27:54.971+02:002016-03-29T08:27:54.971+02:00Your link didn't go to anything specific so I ...Your link didn't go to anything specific so I don't really know much about the situation you describe. <br /><br />There are legitimate reasons to get private banks to lend the money rather than the central bank. It means that the projects will probably be more commercially viable and less politically motivated. <br /><br />It could also lead to banks cherry-picking the most profitable projects and under-investing in those that the country most needs.Ari Andricopouloshttps://www.blogger.com/profile/00181838814176635218noreply@blogger.comtag:blogger.com,1999:blog-1513588060557517621.post-72275124209019643972016-03-29T00:14:11.882+02:002016-03-29T00:14:11.882+02:00From Canada, how do you see this challenge (IMF wa...From Canada, how do you see this challenge (IMF was a bad deal) www.comer.org <br />Our Bank of Canada, around 1973/4, allowed private banks to be a 'middle man' in lending. Instead of our national bank lending to provinces/municipalities to do work projects, etc. they allowed private banks to insert themselves as lenders, thus taking a profit and essentially causing our national debt to rise.<br />Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-1513588060557517621.post-23379423944940577562016-03-22T13:53:22.831+01:002016-03-22T13:53:22.831+01:00As I say, I don't know anything about Ghana an...As I say, I don't know anything about Ghana and it may be wrong. But I do believe that there are basic principles of money and a healthy long-term economy relies on sticking to them.<br /><br />And from what I see the prospects for Ghana look excellent if they can avoid the traps as it appears well run. <br /><br />Thank you for your interest and I hope you can use whatever influence you have in Ghana to bring about more good policy.Ari Andricopouloshttps://www.blogger.com/profile/00181838814176635218noreply@blogger.comtag:blogger.com,1999:blog-1513588060557517621.post-49099506575508522952016-03-22T13:44:56.482+01:002016-03-22T13:44:56.482+01:00Your suggestions make sense. Perhaps our currency ...Your suggestions make sense. Perhaps our currency is overvalued and it's not worth maintaining it with further external borrowing. Now all that is left is the political will. <br /><br />Thanks. And I hope to read a lot more of your work.readjeromehttp://ceditalk.comnoreply@blogger.comtag:blogger.com,1999:blog-1513588060557517621.post-23692099513886169122016-03-22T13:33:38.428+01:002016-03-22T13:33:38.428+01:00Your reply is fasinating and I have looked on the ...Your reply is fasinating and I have looked on the internet to get further details. <br /><br />The first thing to say is that Ghana's economy should on the face of it be healthy despite the obvious impact of the commodity boom and bust cycle. Capacity for growth is high. Unemployment appears low and real growth has historically been pretty high. I don't know but there may be some issue of distribution of income (often there is in commodity economies); the more evenly distributed, the higher domestic demand will be.<br /><br />The issues facing Ghana (from my limited understanding) are:<br /><br />1) During the commodities boom, the power to buy foreign goods went up a lot. Standards of living increased in this sense. With the commodities bust this has reversed. There is nothing that can be done about this; the currency has to go down and buying power has to be reduced.<br /><br />A 30% drop in the currency has caused inflation to be very high but this is not anything that can be remedied. It is just the way it is.<br /><br />The only inflation that should concern a central bank or government is that of domestic goods and services. This is a sign of an overheating economy. Inflation forced by external issues is a sign of a weakening economy and is not a reason to tighten policy - if anything the opposite.<br /><br />So Ghana does have an inflation problem but if this is largely due to the commodity bust then it is unfortunate but should be ignored.<br /><br />2) Increasing foreign debt may enable a higher standard of living but still must be avoided at all costs. The IMF has only one thing in mind - getting its money back. It wil force austerity to pay back the loans and can't abide a falling currency that will make it harder for it to get its money back. To a certain extent the natural resources Ghana has are priced in a foreign currency so there is a certain matching of asset and liabilities, but still it is much much better to avoid these traps. Just the presence of the IMF in Ghana can lead to bad policy decisions - tightening of fiscal policy just to make sure that creditors get their Dollars and Euros back.<br /><br />3) From points 1 and 2, the conclusion is that Ghana must accept that it has lost a lot of relative wealth in the commodities bust. The situation is tough and will lead to hardship, the standard of living attained before can not be got back quickly. This can be partly ameliorated with a wider distribution of government spending, giving more to those most in need.<br /><br />However, what it must not do is make the situation worse by borrowing in foreign currency to keep pretending things are OK. Things are not OK, but they will deteriorate rapidly if you try to pretend they are. Borrowing from the IMF will, unless commodity prices pick up again, probably end badly after years of underperformance.<br /><br />Instead it should prioritise avoiding unemployment. If there is unemployment then more government money should be spent on investment projects until there is low unemployment again. <br /><br />If the IMF is an obstacle to this, then it shows why they need to be paid back as soon as possible. Their rules, whilst some may improve competitiveness etc, are in general a curse on the economy. They are not your friends, they are taking money from you and don't care about the effects.<br /><br />The currency should be allowed to fall further if necessary. It will pick up as economic growth comes back.<br /><br />This is my view on the situation - I hope it is of interest.Ari Andricopouloshttps://www.blogger.com/profile/00181838814176635218noreply@blogger.comtag:blogger.com,1999:blog-1513588060557517621.post-77330503746389692032016-03-22T12:53:56.835+01:002016-03-22T12:53:56.835+01:00Thanks for the reply. A bit more info:
Ghana depe...Thanks for the reply. A bit more info:<br /><br />Ghana depends on export of cocoa, gold and oil. Inflation has been a constant problem until the time of the commodity boom in 2011-2013 when inflation remained under 10%, the cedi (our currency) was stable and government was able to borrow on the international market at relatively low rates. <br /><br />The commodity slump hit us hard - inflation is at 18.5%, our latest eurobond issue was at an interest rate of 10.75% (even with a world bank guarantee) and the CB raised interest rates to 26%, a 13 year high. We went for an extended credit facility with the IMF and have reduced our deficit from 10.2% in 2014 to 7.1% in 2015. But among the conditions for borrowing is that the government can't borrow from the CB. <br /><br />We're in an election year and the government is targeting a deficit of less than 6% but everyone is doubtful because spending goes up in election years. The strategy of the government is to borrow long-term to settle short-term debt and to increase domestic tax revenue (which it has succeeded to do).<br /><br />The cost of production is so high that almost everyone wants government debt. 79% of banks' portfolio is government debt. Had I my way, the government should spend this money since the private sector is unwilling to invest right now. But the deficit targets agreed with the IMF and the fear of a depreciating the currency makes that a difficult option. It's quite a fix.readjeromehttp://ceditalk.comnoreply@blogger.comtag:blogger.com,1999:blog-1513588060557517621.post-59565411257597323342016-03-21T22:24:00.276+01:002016-03-21T22:24:00.276+01:00Thank you Jerome, very kind.
First, I think borro...Thank you Jerome, very kind.<br /><br />First, I think borrowing in foreign currency must stop. It can really destroy the economy, as you know. It like a time bomb. International rules do not support countries like Ghana, they enforce misery for many years. <br /><br />How to do this? The government must show that it is credibly targeting a low-ish inflation level. I don't know anything about Ghana, but I'd say you need an independent central bank and credible fiscal rules in place to make sure inflation stays below, say, 5% and that foreign and domestic investors believe it will permanently stay below that level. If investors have confidence in the government, then you should be able to borrow in your own currency. The real interest rate may be quite high, but the potential for growth in Ghana is too. Real growth should come and investors will have more confidence in lending to your government.<br /><br />In bad times the currency will go down but that will protect the economy, not bankrupt the government. <br /><br />Basically, even if it costs a lot more you must borrow in local currency. At worst it means interest payments to your own citizens.<br /><br />The other option is to have the central bank lend money to the government. Once again, a credible inflation target must be hit to maintain economic stability. Everything is the same as above, terms of government discipline, otherwise it is a slippery slope to chaos. But if they do set up institutions which maintain discipline, I see no problem with this approach.<br /><br />The third option is a hybrid where government borrows money on the market but the central buys the bonds if the interest rate gets too high due to default risk.<br /><br />Infrastructure projects that increase future growth are a good idea to get people to work. Education and training also important to improve the supply side.<br />Ari Andricopouloshttps://www.blogger.com/profile/00181838814176635218noreply@blogger.comtag:blogger.com,1999:blog-1513588060557517621.post-91791720727218007112016-03-21T21:54:50.930+01:002016-03-21T21:54:50.930+01:00Compelling case, brilliant post. I want to know wh...Compelling case, brilliant post. I want to know what you think about the case of economies such as Ghana (where I'm from) with external debt at 40% of GDP and where any attempt at derailing from the fiscal and monetary tightening demanded by the IMF leads to a sharp depreciation of the currency, raising the debt level in local currency terms and hiking the yield demanded by subscribers to our foreign currency denominated bonds. readjeromehttp://ceditalk.comnoreply@blogger.comtag:blogger.com,1999:blog-1513588060557517621.post-32355500621936427552016-02-11T10:14:42.866+01:002016-02-11T10:14:42.866+01:00Max, thank you. Hearing things like this make it w...Max, thank you. Hearing things like this make it worthwhile.Ari Andricopouloshttps://www.blogger.com/profile/00181838814176635218noreply@blogger.comtag:blogger.com,1999:blog-1513588060557517621.post-76282101361597029842016-02-11T05:19:25.805+01:002016-02-11T05:19:25.805+01:00Sorry I can't add anything substantive, but re...Sorry I can't add anything substantive, but really enjoyed your essay and thanks for taking the time to write it! I had a nice joyous laugh from this, "As I discuss here, there is nothing good for society about people saving money. If people could save something useful, like the environment, then they would be doing a social good. But saving numbers on a computer screen does nothing."Max Rottersmanhttps://www.blogger.com/profile/14692296462072888394noreply@blogger.comtag:blogger.com,1999:blog-1513588060557517621.post-89354664904255197232015-07-01T09:56:18.455+02:002015-07-01T09:56:18.455+02:00Thanks.
China is an fascinating economy, and I re...Thanks.<br /><br />China is an fascinating economy, and I recommend Michael Pettis and Anne Stevenson Yang for further understanding. <br /><br />The high savings rate is forced by government policy that subsidises investment on a massive scale. The government keeps spending up with high borrowing (both public and private, often state backed) for investments, but it also has high GDP growth which makes the ratios look not too bad. The huge government spending brings growth as predicted above, but the model is unsustainable.<br /><br />The low consumption rate is a huge problem because at some point the investment needs to have a return and if the consumer has no spending power it can't. They are stuck in a position where they need to keep investing more to keep the economy growing even though the return is now often negative.<br /><br />Anyway, better to read the experts on this than myself. It is very different from the situation in the West and I really do recommend reading about it. <br /><br />But the one thing China has in its favour is that the opacity of the government means that it can effectively print money to write off bad debts, therefore reducing the problem of a debt overhang when the crash finally does come. In the West we have decided to protect savers from inflation at the expense of the economy.Ari Andricopouloshttps://www.blogger.com/profile/00181838814176635218noreply@blogger.comtag:blogger.com,1999:blog-1513588060557517621.post-28004519172420772842015-07-01T03:07:24.236+02:002015-07-01T03:07:24.236+02:00Good post. I wonder how China and other emerging c...Good post. I wonder how China and other emerging countries are situated with respect to total debt and government to private debt ratio. They seem to be able to maintain a high nominal growth rate. I recall that China has a high savings rate as well.Elwaillyhttps://www.blogger.com/profile/12065485408702066657noreply@blogger.comtag:blogger.com,1999:blog-1513588060557517621.post-11428112917652698372015-06-26T22:13:55.551+02:002015-06-26T22:13:55.551+02:00Well said
Remembering Angela Merkels debt break, t...Well said<br />Remembering Angela Merkels debt break, threat for entire Europe.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-1513588060557517621.post-55628256573902618522015-06-26T21:29:59.431+02:002015-06-26T21:29:59.431+02:00Thanks Marko,
I fear that you are correct and tha...Thanks Marko,<br /><br />I fear that you are correct and that we are going to reach it the wrong way.<br /><br />In Japan, I would argue that the government are not spending enough and it is because of all those people saying they need to reduce their debt. A few percent more of government spending in the right place should bring more growth and reduce the debt to gdp ratio. In fact any spending with a multiplier of more than 0.5 reduces the debt to gdp ratio at their level of debt - surely this is possible?<br /><br />It seems to me that the real danger of high debt are all those people saying you need to reduce it. Apart from that, interest rates are low and the central bank can always step in. But the 'responsible' people are causing the problem that they claim they are trying to solve.Ari Andricopouloshttps://www.blogger.com/profile/00181838814176635218noreply@blogger.comtag:blogger.com,1999:blog-1513588060557517621.post-37138674728718400582015-06-26T21:16:07.778+02:002015-06-26T21:16:07.778+02:00Good stuff.
I wish we had continued the post-cris...Good stuff.<br /><br />I wish we had continued the post-crisis stimulus in the U.S. until gov't debt/gdp reached about 150% , because I think we'd be in much better shape now with private debt/gdp lowered by 40-50 points or so. Even if the combined debt/gdp was the same ( ~ 240% of gdp ) or somewhat higher than it is today , the economy would be more robust because of the reduced debt overhang on the private sector.<br /><br />The Japan experience is tough to evaluate. They seemed to get a good tradeoff of public vs private leverage with their gov't spending from ~ '95-2005 , but then they backed off on the deficit levels. Now public debt/gdp seems to rise continuously with little or no offset in private debt/gdp.<br /><br />The political bias against deficits is so strong ( on the left and the right , US and UK ) that I don't have much hope that we'll see 150% gov't debt/gdp levels unless we have another crisis. <br /><br />MarkoAnonymousnoreply@blogger.com