Comments on Martin Sandbu "Shaking off Europe's German bonds", 18/08/2011, http://www.businessspectator.com.au/bs.nsf/Article/Eurozone-debt-crisis-eurobonds-markets-yields-Germ-pd20110817-KT3T8?OpenDocument&src=rot
While the argument that size matters is reasonable enough, the use of the US and Japan as example needs some caution, because each has its own advantages that are not just limited to their sizes.
Japan first. How much of the Japanese government bonds is has been bought and held by funds and people outside Japan? My answer is likely to be: not much and its share is small. If that answer is correct, then it shows the Japanese are different in some key aspects in terms of their portfolio investments in Japan and abroad, as opposed to most other people in the west. It is the Japanese they themselves buy their low yield government bonds.
Now the US. It is true that it has been the largest economy and also a very large government bonds market - that is, its size is large. However, its political influences and its role as the leader of the west world also have a significant effect beyond the size of its government bonds market.
Ignoring these characteristics of Japan and the US is likely to make the argument and conclusion questionable.
Of course, another consideration is whether the individual states of the USA need to issue their own bonds or can they use the federal government bonds to finance their own debts.
One needs also recognise the further difficulty that the euro zone or EU have a looser structure than the USA. Would the key members that are in a better state be willing to subsidise other members so explicitly?
Showing posts with label government debt. Show all posts
Showing posts with label government debt. Show all posts
2011-08-16
Rethink and redesign economic policies
Comments on Stephen Grenville “Curing the US policy paralysis”, 16/08201, http://www.businessspectator.com.au/bs.nsf/Article/US-debt-ceiling-economic-policy-politics-deficit-f-pd20110815-KR8BT?OpenDocument&src=rot
While the suggestions in the post are obviously rational economic thinking, they may encounter stiff political headwind at the current political and government deficits and debt environment.
I think any rational economic arguments must take into account the current environment and constraints to be feasible and practical.
The US obviously needs to increase tax, or reduce expenditure to be fiscally sustainable. But at the same time, fiscal policy should have a real expansionary effect to stimulate the economy and get it back to normal growth and to reduce unemployment.
The two may apparently appear to be contradictory ad unreconcilable. However, the right fiscal policy can still be designed and implemented.
What the US, and indeed many other west economies which are having similar problems, need is to shift from the pure quantitative fiscal thinking in economics to designing the a better structural fiscal policy to increase the real effectiveness of fiscal policy.
For example, the practice of work for the dole program that has been seen in Australia could be supplemented by directing the "workers" to work for government public work, or for private enterprises to have a win-win-win situation for both the government, private enterprises and the unemployed.
In fact, many policies could be redesigned to make the same quantity of fiscal expenditure to have a much greater effect, so to increase the effectiveness or productivity of fiscal spendings.
In terms of increasing taxes or ending the tax cuts, a more politically feasible option is to end or reduce the tax cuts for all, both rich and poor, by the same proportion, at the same time, the US government could make those reductions a low or no interest 'loan' available to the same people. In that way, the fiscal sustainability can be achieved while the impact on real consumption is minimised.
So, if economists and government policy makers are innovative and creative enough, the current economic problems can be resolved.
2011-05-19
Daniel Gros' solution to Irish sovereign debts no credible
Comments on Daniel Gros “How to make Ireland solvent”, 19/05/2011, http://www.businessspectator.com.au/bs.nsf/Article/Ireland-foreign-debt-bail-out-Irish-pension-funds--pd20110518-GY97D?OpenDocument&src=rot
Daniel Gros appears to have been confused by different ownerships and their implications.
A/the government of a country is different from its individual constituency. Their interests may be the same on some matters, but can differ in a whole range of other matters.
In another word, their interests may converge on some and diverge on some others. Further, the interests of different constituent members are different.
This is no different to taxation.
A country (or rather its government) may bankrupt, but some of its constituency members may not be affected by that, or may even benefit from that.
Even in the context of Daniel Gros concerns, those funds may actually do better if they avoid poor Irish government bonds altogether, given the risks associated with them.
It is the risk weighted returns that matter, not what Daniel Gros simply argued.
Daniel Gros may have assumed away those risks, but those funds are unlikely to do the same.
Daniel Gros may argue that the GFC cannot happen because there are always credits for any debts owed, so if all parties come together, there will not be any credit crunch and shortages.
Is that line of argument credible in the real world? Even Daniel Gros must admit it is not.
Daniel Gros appears to have been confused by different ownerships and their implications.
A/the government of a country is different from its individual constituency. Their interests may be the same on some matters, but can differ in a whole range of other matters.
In another word, their interests may converge on some and diverge on some others. Further, the interests of different constituent members are different.
This is no different to taxation.
A country (or rather its government) may bankrupt, but some of its constituency members may not be affected by that, or may even benefit from that.
Even in the context of Daniel Gros concerns, those funds may actually do better if they avoid poor Irish government bonds altogether, given the risks associated with them.
It is the risk weighted returns that matter, not what Daniel Gros simply argued.
Daniel Gros may have assumed away those risks, but those funds are unlikely to do the same.
Daniel Gros may argue that the GFC cannot happen because there are always credits for any debts owed, so if all parties come together, there will not be any credit crunch and shortages.
Is that line of argument credible in the real world? Even Daniel Gros must admit it is not.
2010-12-15
Debt, tax, wastes and infrastructure
Comments on Peter van Onselen “Unlike a household budget, the national economy goes on forever”, 15/12/2010, http://www.theaustralian.com.au/business/opinion/unlike-a-household-budget-the-national-economy-goes-on-forever/story-e6frg9if-1225971141902
Peter, what you said is obviously true. However, you ignored a few important points.
Firstly, the combination of wastes and increasing government debt is never to be a good look. Under such circumstances, arguing against increasing public debt is not a bad thing to do. That is because there is available fund to do the things you argued which can be done using public debt.
Secondly, the politics of governing and opposition is very different. The opposition's main job is to hold the government to account and expose any shortcomings, weaknesses and mistakes of the government. It is the job of the government to determine what direction to take and what the priority should be.
In this instance, whether there is a need to increase government debt to fund any infrastructure building. Even under this scenario, the government has had difficulties in arguing its case because of its inability to put a business case and cost benefit study for its NBN that it argues is the largest nation building infrastructure project ever.
Thirdly, it is always better to have no debt or lower debt than higher debt, other things equal. The argument that the nation lives forever and grows forever cannot be used to have government debt for that sake. One must prove that the benefits outweigh the costs of having debt.
Fourthly, there is also a trade off between government debt and higher tax and the net benefits between using the two, just as private companies do in terms of using equity and debt financing. That also has an inter-generational dimension. It is interesting that you have not put any reason using debt is superior to more tax.
In summary, it appears that the opposition has done a very good job in its argument against increasing the nation’s public debt and forced the government to take a more cautious approach to spending than otherwise it would do.
Regrettably, the government is continuing its NBN white elephant project in spite of its exposed wastes in pink batts and BER. That is deplorable.
That should be applauded and supported, as opposed to your half rational argument to the contrary.
Peter, what you said is obviously true. However, you ignored a few important points.
Firstly, the combination of wastes and increasing government debt is never to be a good look. Under such circumstances, arguing against increasing public debt is not a bad thing to do. That is because there is available fund to do the things you argued which can be done using public debt.
Secondly, the politics of governing and opposition is very different. The opposition's main job is to hold the government to account and expose any shortcomings, weaknesses and mistakes of the government. It is the job of the government to determine what direction to take and what the priority should be.
In this instance, whether there is a need to increase government debt to fund any infrastructure building. Even under this scenario, the government has had difficulties in arguing its case because of its inability to put a business case and cost benefit study for its NBN that it argues is the largest nation building infrastructure project ever.
Thirdly, it is always better to have no debt or lower debt than higher debt, other things equal. The argument that the nation lives forever and grows forever cannot be used to have government debt for that sake. One must prove that the benefits outweigh the costs of having debt.
Fourthly, there is also a trade off between government debt and higher tax and the net benefits between using the two, just as private companies do in terms of using equity and debt financing. That also has an inter-generational dimension. It is interesting that you have not put any reason using debt is superior to more tax.
In summary, it appears that the opposition has done a very good job in its argument against increasing the nation’s public debt and forced the government to take a more cautious approach to spending than otherwise it would do.
Regrettably, the government is continuing its NBN white elephant project in spite of its exposed wastes in pink batts and BER. That is deplorable.
That should be applauded and supported, as opposed to your half rational argument to the contrary.
2009-10-02
Wealth effect of government debt on consumption
Comments on Alan Kohler “Desperation masked by euphoria”, 1/10/2009, http://www.businessspectator.com.au/bs.nsf/Article/IMF-bank-write-downs-capital-raisings-double-dip-r-pd20091001-WDS7W?OpenDocument&src=sph
The problems with increased government debts are that sooner or later, it will be factored into a nation's wealth and into consumption and savings.
Most high debt countries developed countries so far have not seen that effect, but it will catch up with them one day, even though it is difficult to say how long that will be given that bubbles can be very persistent.
Japan's since the 1990 is a good example of the effect of wealth dive on consumption and the economy and its experience will be repeated by quite a number of countries.
Alternatively, some countries might run inflation reduce the burden of government debt for the government, but that can only be a disguised taxing instrument and most nations cannot escape the wealth effect of high debt.
Maybe the US will be the last one given its safe haven status so far and the fact that a large part of its government debt is held by other nations. Lucky Americans!
The problems with increased government debts are that sooner or later, it will be factored into a nation's wealth and into consumption and savings.
Most high debt countries developed countries so far have not seen that effect, but it will catch up with them one day, even though it is difficult to say how long that will be given that bubbles can be very persistent.
Japan's since the 1990 is a good example of the effect of wealth dive on consumption and the economy and its experience will be repeated by quite a number of countries.
Alternatively, some countries might run inflation reduce the burden of government debt for the government, but that can only be a disguised taxing instrument and most nations cannot escape the wealth effect of high debt.
Maybe the US will be the last one given its safe haven status so far and the fact that a large part of its government debt is held by other nations. Lucky Americans!
2009-09-07
Turnbull may not necessarily paint himself into the coner
Comments on Glenn Milne “Debt rhetoric paints Malcolm Turnbull into a corner”, 7/09/2009, http://www.theaustralian.news.com.au/story/0,25197,26035135-33435,00.html
While there might be a risk, Turnbull should have a strong point to run, not just for now, but also in leading up to the next election and the opposition’s broad budgetary strategy for going to the next election.
It will not be difficult to do it. It needs some prerequisites. The first one is that it needs that the Rudd government could be exposed to budgetary imprudence. That has been and will continue to be exposed from now on. The school’s wasteful spending and costs overrun is a primary example. The federal government’s Indigenous housing fiasco in the Northern Territory is another. So Turnbull and the opposition have got some real facts already on their hands. The question is how to best use them to their greatest political advantage.
The second one is the ability to prepare a broad budget that is within the federal government’s overall spending but in a smarter design either to deliver a better outcome or the same outcome with smaller spending and hence smaller budget deficit and debt implications. It will not be very easy to do it, but should not be too hard for the coalition if they prepare themselves well and start to do it from now.
The key lies that the opposition needs to hammer the government on budget management and spending priority and efficiency. On that one, the opposition has an advantage.
If the opposition uses its advantages in managing budgets and debts well, it has a very good chance to either significantly closing the gap with the government or win the next election.
With due respect to Glenn Milne, he may be wrong on this point.
While there might be a risk, Turnbull should have a strong point to run, not just for now, but also in leading up to the next election and the opposition’s broad budgetary strategy for going to the next election.
It will not be difficult to do it. It needs some prerequisites. The first one is that it needs that the Rudd government could be exposed to budgetary imprudence. That has been and will continue to be exposed from now on. The school’s wasteful spending and costs overrun is a primary example. The federal government’s Indigenous housing fiasco in the Northern Territory is another. So Turnbull and the opposition have got some real facts already on their hands. The question is how to best use them to their greatest political advantage.
The second one is the ability to prepare a broad budget that is within the federal government’s overall spending but in a smarter design either to deliver a better outcome or the same outcome with smaller spending and hence smaller budget deficit and debt implications. It will not be very easy to do it, but should not be too hard for the coalition if they prepare themselves well and start to do it from now.
The key lies that the opposition needs to hammer the government on budget management and spending priority and efficiency. On that one, the opposition has an advantage.
If the opposition uses its advantages in managing budgets and debts well, it has a very good chance to either significantly closing the gap with the government or win the next election.
With due respect to Glenn Milne, he may be wrong on this point.
2009-08-13
Be a responsible government and manage the economy and budget well
Comments on Alan Wood “There's plenty to borrow, but Rudd will need to cut debt”, 13/08/2009, http://www.theaustralian.news.com.au/story/0,25197,25920869-5013578,00.html
There are several issues raised in this article. Firstly, it is not just the level of budget deficit and government debt but also the quality of government spending that leads to the deficits and debts that will matter. While it is difficult to judge the level of the projected budget deficit is the appropriate or not at the time of the budget being made, it has now been shown that some of the government spending in its budget measures are wasteful and could have been better targeted and managed to either reduce the size of deficits or achieve greater and better outcomes.
Secondly, Australia is a small country internationally, so the impact of its borrowing internationally will not have a significant impact on the international capital market, although the costs of borrowing both publicly and privately will be higher due to tightening internationally capital market. That impact may be sizeable in terms of the dollar amount, but that should not be a worry itself.
Thirdly, it is absolutely an imperative for any government especially the Rudd one to guard against unnecessary government spending and be smarter, highly focused and well targeted in its fiscal policy to minimise spending and maximise the budget impact on growth and employment. The government must wind down its deficits and reduce the debts as early as possible and stand ready at any time when and if appropriate to do that.
Rudd and his government, have a huge responsibility to return the trust the Australian public has given them and do a better job than they have done so far. They paid some learning fees in how to manage the economy. They should learn rapidly enough to get on top of their jobs, starting from now.
There are several issues raised in this article. Firstly, it is not just the level of budget deficit and government debt but also the quality of government spending that leads to the deficits and debts that will matter. While it is difficult to judge the level of the projected budget deficit is the appropriate or not at the time of the budget being made, it has now been shown that some of the government spending in its budget measures are wasteful and could have been better targeted and managed to either reduce the size of deficits or achieve greater and better outcomes.
Secondly, Australia is a small country internationally, so the impact of its borrowing internationally will not have a significant impact on the international capital market, although the costs of borrowing both publicly and privately will be higher due to tightening internationally capital market. That impact may be sizeable in terms of the dollar amount, but that should not be a worry itself.
Thirdly, it is absolutely an imperative for any government especially the Rudd one to guard against unnecessary government spending and be smarter, highly focused and well targeted in its fiscal policy to minimise spending and maximise the budget impact on growth and employment. The government must wind down its deficits and reduce the debts as early as possible and stand ready at any time when and if appropriate to do that.
Rudd and his government, have a huge responsibility to return the trust the Australian public has given them and do a better job than they have done so far. They paid some learning fees in how to manage the economy. They should learn rapidly enough to get on top of their jobs, starting from now.
2009-06-09
Andrew Leigh is proud of the wrong arguments
Comments on Andrew Leigh’s own blog on the 21 economists’ letter, June 2009, http://andrewleigh.com/?p=2104
With due respect, I think that letter is full of nonsense. I sent part one of my comments on that letter to AFR, though the letter facility, but I don't know if they will publish that. I have posted in a blob as:
http://mrlincolns.blogspot.com/2009/06/21-prominent-aussie-economists-half.html
I am preparing part two of my comments on that letter which will focus on more specific points of that letter. When it is finished I will advise you.
I think that letter has problems with simple logic. It is confusing at the best and deeply misleading at the others. The first part of my comments deals with the letter's quote of Krugman and Blanchard. To quote from famous economist to start off the letter is weak at the best and to use them as supports for own illogical arguments is laughable. You and other can have a look how those quotes are problematic, from part one of my comments.
I provide the following brief comment, to give you a flavour why that letter is wrong. The main point is that the letter misses the point of the current debate on the government debt. The main issue is not about whether it is necessary to have a debt, but what level of it. Related to it is whether every government fiscal measure is necessary and effective in stimulating the economy and cost effective.
With due respect, I think that letter is full of nonsense. I sent part one of my comments on that letter to AFR, though the letter facility, but I don't know if they will publish that. I have posted in a blob as:
http://mrlincolns.blogspot.com/2009/06/21-prominent-aussie-economists-half.html
I am preparing part two of my comments on that letter which will focus on more specific points of that letter. When it is finished I will advise you.
I think that letter has problems with simple logic. It is confusing at the best and deeply misleading at the others. The first part of my comments deals with the letter's quote of Krugman and Blanchard. To quote from famous economist to start off the letter is weak at the best and to use them as supports for own illogical arguments is laughable. You and other can have a look how those quotes are problematic, from part one of my comments.
I provide the following brief comment, to give you a flavour why that letter is wrong. The main point is that the letter misses the point of the current debate on the government debt. The main issue is not about whether it is necessary to have a debt, but what level of it. Related to it is whether every government fiscal measure is necessary and effective in stimulating the economy and cost effective.
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