Saturday, June 27, 2015

Off the mark

Via Reddit, from the IMF, the working paper What Really Drives Public Debt: A Holistic Approach (PDF, 25 pages). From the intro:
Recent years have witnessed a rapid increase in public debt—in 2007, gross general government debt in advanced economies stood at around 70 percent of GDP; by 2013, this had risen to over 105 percent (IMF, 2014). Concerns over sovereign debt sustainability have led to significant financial and economic disruption; and the optimal policy response to these elevated debt levels is a topic of controversy amongst policymakers and academics.

The proximate causes of this rapid increase in debt are well know. Deep recessions reduced nominal GDP and caused primary balances to deteriorate; banking sector recapitalisation forced step changes in the debt level; and in some cases, sovereign bond yields spiked, increasing the cost of debt. But what is less clear is how these various drivers of debt interacted with each other, to propagate or mitigate the eventual impact on the debt level.

Yeah, ain't that cute? A look at public debt. The world begins in 2007.

These people can't be that stupid. They have to know that for the 60 years before 2007, private debt increased, and private debt increased, and private debt increased some more. They recognize that "banking sector recapitalisation" was occurring, for example. And yet, their focus is "sovereign debt sustainability".

An overview of their conclusion:
This paper explores how the various drivers of sovereign debt – the primary balance, the interest rate, growth and inflation—interact with each other...

Sovereign credit markets do not seem to systematically respond to shocks to growth or the primary balance, but are sensitive to the debt level...

This paper, therefore, provides some empirical evidence to support the often cited opinion that monetary policy matters for sovereign debt sustainability...

They're doing what they call "debt sustainability analysis".

Why? Apparently they think high levels of public debt are a problem. Okay, let's not focus on whether they are right or wrong about that. It's their view, and that's what we have to deal with.

If you think high levels of public debt are a problem, what is the proper response? Do you want to find the best way to "manage" those high levels of debt, so that we can succeed in "sustaining" them?

Wouldn't it be more productive to figure out the reasons public debt grow to problematic levels? That way, there is a chance we can avoid those high levels of public debt in the future.

The authors skip the "cause" part, and go straight to analysis of results. The whole thing, all their effort, is a waste of time.


Greg said...

This is a classic example of looking at the other guys behavior as the problem and not yours.

The biggest success of the conservative movement was in painting the Govt as the universal bad guy/other in the 1980s.

Ever since, any crisis starts with looking at what "govt" did.

The Arthurian said...

"The biggest success of the conservative movement was in painting the Govt as the universal bad guy/other in the 1980s."


I am particularly troubled by the direction this meme has taken lately -- for example with the "Hunger Games" movies. Mockingjay Part 2 is listed as "Adventure, Sci-Fi" but the blurb says "Katniss Everdeen and District 13 engage in an all-out revolution against the autocratic Capitol."

Not my kind of adventure.

I saw the earlier movies and liked them. But the problem is that those movies encourage a mindset that favors or accepts all-out revolution in our own country.

I have no problem with blaming the government for what the government has done wrong -- economic policy, I think, is fully to blame. But I have a huge problem when people blame the government first and then look for ways to undermine government or drown it in a bathtub or whatever. Without understanding what the cause of the problem really is.

Greg said...

Right Art.

If you look close enough, I think you will find that what the govt is being directed by is not the average Joe six-pack but instead the very very very above average banker or corporate titan. They have bought our govt. So any complaints about what our govt is doing is ostensibly a complaint against what the CEOs of this country/world want.

I haven't seen any of those movies but my son and daughter in law have and I know enough about the story to be intrigued. Those kind of stories are usually something I am interested in but I agree about with your critique of that mindset. Its the all-out that is wrong. I am all for people not being passive sheep/bots and taking an interest in the how and why of their social circumstances but too often in our sensationalizing culture we celebrate the guys who just blow things up.

Not everything about our system/culture needs to go. We need to get rid of things/ideas which are counterproductive and not destroy the whole thing.

greg said...

Hey Arthurian. Check out my post "The Standard Definition of Money is in Error." at:

I think it is important. But then, I could be mistaken...

Anyway, the only reason 'the people' owe the rich so much is because the rich manipulate the government into lowering the taxes on the rich, so the government instead has to borrow from them to keep functioning. It's a scam.

Auburn Parks said...


The US Govt does not and indeed cannot borrow its own IOUs, just like no other economic entity can borrow its own IOUs. People borrow assets (financial primarily) and all financial assets are the liability of their issuer.

In the case of the US Dollar and the US Govt (of which both Fed and Tsy are a part), TSY securities are US Govt IOUs (and are mostly on the Fed's balance sheet) and Reserves are US Govt IOUs and are mostly on the Fed's balance sheet (minus physical cash). So both types of accounts are IOUs of the US Govt, they are both financial liabilities of the US Govt. So it makes no sense to say the exchanging reserves for TSyies (one Govt IOU for another Govt IOU) is "borrowing" in the context that that word is used colloquially.

Another way to think about this. When people actually borrow money, they must repay this debt with their assets. Chase will not accept more of your IOUs in payment for your home mortgage, you must deliver your financial assets to Chase. And this is how it works for every economic entity in the US Dollar economy. For the US Govt and TSY securities, the Govt is paying off its financial liabilities with its own financial liabilities. This is exactly the opposite of what the non-Federal Govt does when it borrows.

IOW, your comment about the Govt having to acquire its own IOUs from rich people who could have only gotten their Govt IOUs from the govt in the first place in order to keep functioning is confused.

jim said...

Auburn wrote:
"Another way to think about this. When people actually borrow money, they must repay this debt with their assets. Chase will not accept more of your IOUs in payment for your home mortgage"

Apparently you aren't acquainted with some of Chase's loan products that they were offering during the housing bubble .
A loan where Chase will accept more IOU's as payment for a mortgage is called a negative amortization loan.

Zero down Neg-Am loans were an important driver for house price inflation in the housing bubble as they allowed people with little money to buy and flip houses.

Auburn Parks said...


Ahh yes, the good old days, there was no way that could go badly :) Generally speaking, debt is paid off by transferring your commercial bank deposits (your assets) to settle your liabilities. The Govt uses its bank deposits (Fed liabilities) to pay off its TSY liabilities. (Tsy securities).