Britain faces deflation !!!

Sir_Humphrey

!!!!!!? wrote: »

You've said this before - you seem to think that governments can simply borrow endlessly which is not the case.

No, as I clearly said, this will lead to higher taxes once the economy recovers. Personally, I think it is better to pay a higher marginal rate on a larger sum than the alternative of a lower rate on a much lower sum.

!!!!!!? wrote: »

They can certainly get away with running deficits for longer than individuals could but as the national debt increases, so does the cost of servicing it which starts to drag on growth and spending. Ultimately the country will be mired in so much debt that potential buyers of government bonds will start to shy away and or demand higher rates of return for the risk of default - which will put more downward pressure on productivity.

I am not saying there would be no negative side-effects. But as the legacy of the early-1980s shows, the alternative is much worse (generations of unemployed in economic blackspots).

I also question your point about productivity. France has very high productivity (higher than Germany, let alone the UK). That is becasue they correctly are more interested in investing in infrastructure and modern plant than worrying about bits of paper.

!!!!!!? wrote: »

Countries can go broke too, not just individuals.

Countries can (in very rare cases) default, but debt would have to be far higher than the govt proposes for that to happen. Individuals are far more likely to go broke.

Look at it this way. Economies need loans (debt) to invest and grow at a reasonable rate. If you look up to the mid-1970s, govt debt was high, but personal debt low (eg no credit cards - limited hire purchase). After the mid-1970s, govt debt was lowered (except mid-1990s) and personal debt ballooned with deregulation/credit cards/store cards/etc etc.

If you have neither high govt debt and no personal debt, then the general populace live in poverty until the age of fifty in wattle-and-daub huts.

This is why I am not as fussed about govt debt as some here. The govt can have higher debt so the public as individuals do not have to (govts can service debt cheaper than individuals - which presumably is why the banks do not like the idea). If you would prefer the vice-versa situation is a political value judgement.

The fallacy of balanced budgets is that the world is messy and does not obey strict rules. The best you can do is come up with a system that works for 30-40 years. Then it collapses and is replaced by something else and so on and so on. You cannot expect an ever-lasting utopia, the world is just not like that.

WTF?_2

Sir_Humphrey wrote: »

No, as I clearly said, this will lead to higher taxes once the economy recovers. Personally, I think it is better to pay a higher marginal rate on a larger sum than the alternative of a lower rate on a much lower sum.

And when might the economy recover? Public debt has to be serviced irrespective of the state of the economy. As you take on more debt, it becomes a bigger and bigger drag on recovery.

Also, as you get more indebted it tends to put you in a situation where you end up paying more for additional borrowing.

There are already indications that the government is likely to run into problems selling new bond issues soon. That means their scope to keep reducing interest rates to stimulate the economy could well be curtailed if they want people to invest in Sterling bonds.

Sir_Humphrey

!!!!!!? wrote: »

And when might the economy recover? Public debt has to be serviced irrespective of the state of the economy. As you take on more debt, it becomes a bigger and bigger drag on recovery.

Again true. However, economic depressions are a bigger drag. I also think you very much over-estimate the cost of servicing national debt as a % of public spending. I do not have the figures to hand, but it is not as high as you might expect.

The national debt will increase in any case, as companies socialise their problems (i.e sack people).

!!!!!!? wrote: »

Also, as you get more indebted it tends to put you in a situation where you end up paying more for additional borrowing.

So you do not borrow, so you can borrow in the future. But in the future, you would not borrow for the same reason? So you might as well borrow now as that downside would only be theoretical. There is no point in having an option you would never use.

!!!!!!? wrote: »

There are already indications that the government is likely to run into problems selling new bond issues soon. That means their scope to keep reducing interest rates to stimulate the economy could well be curtailed if they want people to invest in Sterling bonds.

As I say elsewhere, I do not think the bond vigilantes have too many options for their money. Also, other governments are likely to take similar steps. If the bond vigilantes are worried about inflation, they need to go back to their economics textbooks. I think the people talking about bond vigilantes may be those with a vested interest in increased gold prices.

posh*spice

dopester wrote: »

Spending reform is needed in my opinion. Smaller government for a start. Tbh I think we're going to see the end of the welfare state because of the debt levels the government and society has taken on..

The last few months has made me believe the total opposite. When I watch what has happened in the US, it makes me believe that the state is the only body that can be relied upon to deliver certain services. Look what has happened with Universities in the US. People have relied upon the money markets to provide for their kids education in the form of college loans. Loans that are no longer available. Look at the state of AIG - how many people have pension funds in there? Truth is that part of the reason we had a housing bubble in the UK is that the financial sector can't be relied upon to deliver pensions to people, which is why so many got caught up in buy-to-let. IMHO I can only see a greater role for the state.

baby_boomer

But the state can't be relied upon to deliver pensions to the 7 million it employs without bankrupting the 14 million it doesn't.

Its existing commitments are already going to break the [state] bank, without adding to them .

It's not a question of "state best" or "private best". The fact is that we have collectively overspent and overborrowed and we're collectively living on the never never. We'll all have to tighten our belts. Your solution may involve going down a couple of sizes at a later date.

But will this mean deflation or - as I now tend towards - inflation?

posh*spice

!!!!!!? wrote: »

You've said this before - you seem to think that governments can simply borrow endlessly which is not the case.

They can certainly get away with running deficits for longer than individuals could but as the national debt increases, so does the cost of servicing it which starts to drag on growth and spending. Ultimately the country will be mired in so much debt that potential buyers of government bonds will start to shy away and or demand higher rates of return for the risk of default - which will put more downward pressure on productivity.

Countries can go broke too, not just individuals.

Britain's public debt position is better than any other G7 country - between 40% to 50% of GDP. This is half the G7 avereage of 93%.

America 61%
Germany 63%
France 64%
Canada 68%
Italy 104%
Japan 195%:eek:

Source - Grant Thornton

So we do have the scope to do a little Keynesian pump priming, personally I hope this involves lots of alternate energy programs, otherwise as the global economy tries to grow we will just be hitting a heads:wall::wall::wall:against a higher oil price again IMHO

posh*spice

!!!!!!? wrote: »

There are already indications that the government is likely to run into problems selling new bond issues soon. That means their scope to keep reducing interest rates to stimulate the economy could well be curtailed if they want people to invest in Sterling bonds.

Agree selling the US and UK debt is the next hurdle but many said the dollar and sterling would have collapsed by now and it hasn't, so they might still successfully sell this debt

kennyboy66_2

posh*spice wrote: »

Agree selling the US and UK debt is the next hurdle but many said the dollar and sterling would have collapsed by now and it hasn't, so they might still successfully sell this debt

If USA, Euro, UK, Swiss & Japanese interest rates are low - lets say 2.5% or less (this doesn't seem to be beyond the realms of what's possible), then where do these so called bond vigilantes go ??.

China - which is still & likely to continue to be a curious mix of communism and free market capitalism.

Russia - how would you describe this - Gangster capitalism ?

Good luck with those 2 choices.

dopester

posh*spice wrote: »

If our economies have become starved of money then governments must act to address this problem. The obvious way is through reductions in interest rates and more expenditure on public sector projects - e.g.renewable energy , public transport, schools, hospital projects). This type of Keynsian spending provides money supply backed with something worthwhile. To me standing around and letting the markets sort themselves out is, frankly, not an option.

I guess you had read this article today?

The Treasury has confirmed it is looking at “fast-tracking” construction projects, including schools and medical buildings, housing and leisure centres.

http://www.timesonline.co.uk/tol/news/politics/article4974689.ece

Sounds like a big waste of money to me. Cut some of these stupid regional development agencies, their fancy salaries and their stupid job titles. Cut Labour's red tape on business.

In contrast the Conservatives want to help teachers and parents set up their own schools lol.

baby_boomer

40% of the education budget goes on administration.

A government which was prepared to trust the professionals could save money AND improve education.