Friday, September 2, 2016

How does he miss it?

Lars P. Syll:
Today there seems to be a rather widespread consensus of public debt being acceptable as long as it doesn’t increase too much and too fast. If the public debt-GDP ratio becomes higher than X % the likelihood of debt crisis and/or lower growth increases.

But in discussing within which margins public debt is feasible, the focus, however, is solely on the upper limit of indebtedness, and very few asks the question if maybe there is also a problem if public debt becomes too low.

The government’s ability to conduct an “optimal” public debt policy may be negatively affected if public debt becomes too small.

That's downright funny: The focus is solely on the upper limit of indebtedness.

I keep coming back to read Syll's post again and again. This is the third time I've started a response to it. The others didn't make it.

Here's my problem with Syll's statement: He considers "public sector budget deficits and debts" and says that many people "raise their voices to urge for reducing the debt". But his reply to those people is that the public debt may be "too low" and "too small".

People say the public debt is too big, and Syll says it's too small. It is a disturbingly empty rebuttal; if it isn't funny, it isn't anything at all.

One of the things that bothers me about Syll's post is that I could follow his whole argument right up to the end, and then it all fell apart in the last paragraph. Syll writes:
To guarantee a well-functioning secondary market in bonds it is essential that the government has access to a functioning market. If turnover and liquidity in the secondary market becomes too small, increased volatility and uncertainty will in the long run lead to an increase in borrowing costs. Ultimately there’s even a risk that market makers would disappear, leaving bond market trading to be operated solely through brokered deals. As a kind of precautionary measure against this eventuality it may be argued – especially in times of financial turmoil and crises — that it is necessary to increase government borrowing and debt to ensure – in a longer run – good borrowing preparedness and a sustained (government) bond market.

I understood every word for 26 paragraphs. Then in the 27th, Syll collapsed into economist-speak.

Syll seems to be saying that a "well-functioning secondary market in bonds" is good for the economy. I guess I can agree with that.

The rest of the paragraph is all speculation. Syll suggests that we need might more bonds to keep the market well-functioning -- "especially in times of financial turmoil and crises". This seems to be a rewording of the old post-crisis argument that there was a shortage of safe assets.

Seems to me to be too much focus on finance, not enough focus on the real sector, and not enough focus on the cost finance imposes on the real sector.

Disputing the argument that public debt is too big, Syll takes the evaluation and stands it on its head: He says public debt is too small. It irks me no end. I would take the focus of the argument -- public debt -- and stand that on its head instead.

I would say private debt is too big.

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