Carmen Reinhardt and Kenneth Rogoff’s observations in „ Growth in a Time of Debt” on the threat of crossing a specific threshold in the ratio between government debt, deficit and GDP raised a debate on the necessity of government debt reduction in the USA (and UK, PIIGs, Argentina and Brazil). However their argument remained unchallenged until now. John Irons and Josh Bevens from the Economic Policy Institute argue in “Government Debt and Economic Growth” that Rogoff and Reinhardt are wrong. Irons and Bevens argue that:
For instance, US subsidies to the defense industry during WWII (1940-1946) resulted in GDP growth from 1943 to 1949. „(…) nearly half of the advanced countries (six of 14) that had experienced high debt levels saw higher growth in the highest debt years...”
According to Irons and Bevens an untrusted currency increases the probability of a financial crisis of a given country. And the level of trust rules out or not a possible sovereign default of this country.
A review of the academic literature on sovereign debt defaults (Manasse and Roubini 2005) finds that it is exposure to currency risk that dominates the probability of debt default or financial crisis. This same review sets out a classification system to sort countries into those safe from debt crises versus those which are not safe—and the simple ratio of public debt to GDP is not found to be a useful predictor variable for this.
Eventually Irons and Bevens are convinced that the USA can safely increase debt because the demand for its bonds is not threatened.
Iron and Bevans agree that a deficit should be sustainable and they do not see it as an alarming situation. In their opinion the biggest threat to economic growth is a lack of policy caused by fear of a deficit.
While we do believe that projected unsustainable deficits in coming decades should be addressed, there is no solid evidence that we are approaching a tipping point. In fact, the greatest threat to economic growth is policy inaction fueled by deficit fears.
Mike Konczal and Arjun Jayadev from The Roosevelt Institute reply to Alberto Alesina and Sylvio Ardagna “Large changes in fiscal policy: taxes versus spending“(August, 2009). Alesina and Ardagna argued that stimulus package should not cause spending increase but rather bring about its reduction and the lowering of taxes. They speculated that government debt reduction should not be an easy process even during rapid economic growth.
It is unlikely that these deficits and debt will disappear simply because growth will resume at very rapid pace very soon.
Konczal and Jayadev, after exactly the same analysis as Ardagna and Alesina, concluded that economies, which once faced the same pressures as the US economy today, did not reduce deficits. However through growth they reduced government debt. According to K&J budget cuts during economic slowdown or severe recession result in a debt increase and a growth slowdown.
Professor Richard Posner, who is usually an optimist, is quite concerned today about economic growth. According to him, yearly economic growth percentage suggests that years will go by before the economy will return to normality. Professor Posner argues that the recession did not end in the third quarter of 2009. He sees three possible causes: reduction in a wealth of households, an increase in the amount of leverage in personal finances (an increase of the amount of savings and decrease in consumption) and the decrease of production.
Professor Gary Becker, who discusses professor Posner’s article, agrees with him but did not see an alarming situation. In his opinion there are different economic cycles which decide the degree of economic development. Those cycles cannot be influenced. Professor Becker points to unnecessary reforms, which have nothing to do with economic crisis: Healthcare reform and the carbon tax.
Instead of introducing additional stimulus packages and further raising the cost of doing business, Congress and the President should try to create an environment where companies, both large and small, and entrepreneurs are recognized as crucial forces in a dynamic economy.
Hyper pessimist Pierre Leconte, known as European doom-prophet, predicts further growth in prices of gold and a decrease of silver, because silver is commonly used in industry and vulnerable to recession. According Leconte developed economies are doomed to depression and developing countries face a threat of economic slowdown.
L’économie occidentale étant vouée à la dépression et les économies émergentes à un fort ralentissement, tout le secteur des produits de base -à l’exception de quelques situations particulières de quasi pénuries concernant certaines céréales et denrées alimentaires- doit fortement corriger à la baisse (au même titre que les actions en général, en particulier celles dites “natural ressources” -sociétés minières, pétrolières, etc.-).
Whether the price of the dollar vs the euro is stabilizing or there is (the graph) a sign of new fall down? – asks Bull Bear Signals.
And a bit of optimism for a new day:
Experience teaches me one thing ; after a crash, markets tend to form„wild volatile bottoms”, with large price swings.
In the meantime, we tend to forget that we are basically forgeting what drives the market ; future earnings …. and guess what , the future looks quite good :)
W styczniu 2020 roku Wielka Brytania formalnie opuściła Unię Europejską. Oczekiwane korzyści z brexitu, poza odzyskaniem suwerenności w zakresie kształtowania prawa i zewnętrznych relacji gospodarczych, jednak się nie zmaterializowały. Widoczny jest natomiast spadek wydajności i konkurencyjności brytyjskiej gospodarki, co wpływa także na kondycję rynku pracy.
