A month ago, I discussed the results of a paper that showed that the main way to reduce debt/GDP-ratios in advanced countries was not budget surpluses but a real rate of interest (r) below the real rate of growth (g), or in technical terms r-g < 0.
Oct 12, 2023·edited Oct 12, 2023Liked by Joachim Klement
Excellent article which neatly avoids the question of whether governments should be allowed to spend the amounts of money which lead to levels of debt which force financial repression and favour inflation - basically robbing people to pay it down. Look no further for why house prices have grown to the point where young people cannot afford them - and that is only one of the long-term harms to the economy and quality of life
As I said, no point about handwringing. Governments will spend too much money, no matter if they are on the left or right of the spectrum. Unless you put a constitutional clause for balanced budgets in place, they will always do that. And the experience of Germany has shown that having a balanced budget clause in your constitution creates all kinds of other problems. In a crisis like the pandemic the German government was severely hamstrung in supporting the economy for fears of creating too large deficits. the result was to agree that this is an emergency when excess deficits were warranted. But that argument just undermines the whole constitutional limits because who defines what an emergency is and what not.
All of that is a long-winded way of saying that government will overspend, no matter what we do. And since we have to deal with the world as it is, not as it should be, it means we have to god down the route of financial repression.
The answer ofc is a different form of government. However, as sound money, that would appear to be a pipe dream, with most alternatives - on the historical evidence - even worse than that we have
could it be that the Swiss government is less prone to over-spending? In which case direct democracy could probably help against the worst excesses of lobby-state spendhappiness.
Having lived in Switzerland for 21 years, I am always surprised about their budget. Every year they plan for a small deficit and then have to revise it upward to a small surplus! Yes, they do it right, but the problem with direct democracy is that it doesn't work in countries that have no experience with it. Direct democracy in countries like the UK (Brexit vote anyone) or the US just creates a platform for populists. The Swiss are the exception that proves the rule.
Brexit might not have happened according to Swiss referendum voting rules. They require a double majority, i.e. in Cantons, as well as in total population. And 40% participation...
On the other hand, semi-direct democracy means that if there was a Switzit, a new referendum to re-enter the EU could easy happen. Which would conceivably get the radical Conservative elements under control.
I see all kinds of practical successes of the Swiss system. The auto lobby is less powerful, so cities are more people-friendly. Public transport is well-financed and well-organized. Right to work is taken seriously; weird labor union ideas such as the 32-hour week have no chance. Most of the bad stuff gets voted away, in due course.
1) Aren't you basing your recipe (for all) on two extremes? Spending Americans and thrifty Germans?
'Governments will spend too much money, no matter if they are on the left or right of the spectrum'
2) Deficits are political. In the US, incumbent republicans (let's not call them conservatives because they're way to revolutionary to earn that title), not seldomly have had the objective to 'kill the beast'.
Meaning: force the gov to cut its costs / manpower by generous spending creating a massive deficit / borrowing costs (typically on the military, having those tax dollars flow back to voters and politicians' financiers - the military industrial complex for instance).
3) Typically, democrats repair republican holes. Presidents & US deficits:
Reagan start: $78.9 B def. / End: $152.6 B. Increased def.
Bush 41 start: $152.6 B def. / End: $255 B. Increased def.
Clinton start: $255 B. def. / End: $128.2 B. + Surplus.
Bush 43 start: $128.2 B + / End: $1.41 T. Increased def.
Obama start: $1.41 T def. / End $584.6 B. Decreased def.
Trump start: $584.6 def. / End (2019 pre covid): $1.1 T. Increased def.
Well, yes, I mostly refer to Americans and Germans, but the trend is the same in my current home in the UK. I don't know enough about France, Spain, Italy or Asian nations but just looking at deficit stats over time, I don't see any difference in behaviour over time, though arguably in many countries political leadership has at least changed sometimes.
There seems to be a profligacy which has taken hold among Western governments. It is almost as if because this debt cannot be repaid it just doesn't matter and inflation itself is unimportant as we run up to an inevitable 'Great Reset'
Excellent article which neatly avoids the question of whether governments should be allowed to spend the amounts of money which lead to levels of debt which force financial repression and favour inflation - basically robbing people to pay it down. Look no further for why house prices have grown to the point where young people cannot afford them - and that is only one of the long-term harms to the economy and quality of life
As I said, no point about handwringing. Governments will spend too much money, no matter if they are on the left or right of the spectrum. Unless you put a constitutional clause for balanced budgets in place, they will always do that. And the experience of Germany has shown that having a balanced budget clause in your constitution creates all kinds of other problems. In a crisis like the pandemic the German government was severely hamstrung in supporting the economy for fears of creating too large deficits. the result was to agree that this is an emergency when excess deficits were warranted. But that argument just undermines the whole constitutional limits because who defines what an emergency is and what not.
All of that is a long-winded way of saying that government will overspend, no matter what we do. And since we have to deal with the world as it is, not as it should be, it means we have to god down the route of financial repression.
The answer ofc is a different form of government. However, as sound money, that would appear to be a pipe dream, with most alternatives - on the historical evidence - even worse than that we have
could it be that the Swiss government is less prone to over-spending? In which case direct democracy could probably help against the worst excesses of lobby-state spendhappiness.
Having lived in Switzerland for 21 years, I am always surprised about their budget. Every year they plan for a small deficit and then have to revise it upward to a small surplus! Yes, they do it right, but the problem with direct democracy is that it doesn't work in countries that have no experience with it. Direct democracy in countries like the UK (Brexit vote anyone) or the US just creates a platform for populists. The Swiss are the exception that proves the rule.
Brexit might not have happened according to Swiss referendum voting rules. They require a double majority, i.e. in Cantons, as well as in total population. And 40% participation...
On the other hand, semi-direct democracy means that if there was a Switzit, a new referendum to re-enter the EU could easy happen. Which would conceivably get the radical Conservative elements under control.
I see all kinds of practical successes of the Swiss system. The auto lobby is less powerful, so cities are more people-friendly. Public transport is well-financed and well-organized. Right to work is taken seriously; weird labor union ideas such as the 32-hour week have no chance. Most of the bad stuff gets voted away, in due course.
US, Germany.
1) Aren't you basing your recipe (for all) on two extremes? Spending Americans and thrifty Germans?
'Governments will spend too much money, no matter if they are on the left or right of the spectrum'
2) Deficits are political. In the US, incumbent republicans (let's not call them conservatives because they're way to revolutionary to earn that title), not seldomly have had the objective to 'kill the beast'.
Meaning: force the gov to cut its costs / manpower by generous spending creating a massive deficit / borrowing costs (typically on the military, having those tax dollars flow back to voters and politicians' financiers - the military industrial complex for instance).
3) Typically, democrats repair republican holes. Presidents & US deficits:
Reagan start: $78.9 B def. / End: $152.6 B. Increased def.
Bush 41 start: $152.6 B def. / End: $255 B. Increased def.
Clinton start: $255 B. def. / End: $128.2 B. + Surplus.
Bush 43 start: $128.2 B + / End: $1.41 T. Increased def.
Obama start: $1.41 T def. / End $584.6 B. Decreased def.
Trump start: $584.6 def. / End (2019 pre covid): $1.1 T. Increased def.
Well, yes, I mostly refer to Americans and Germans, but the trend is the same in my current home in the UK. I don't know enough about France, Spain, Italy or Asian nations but just looking at deficit stats over time, I don't see any difference in behaviour over time, though arguably in many countries political leadership has at least changed sometimes.
There seems to be a profligacy which has taken hold among Western governments. It is almost as if because this debt cannot be repaid it just doesn't matter and inflation itself is unimportant as we run up to an inevitable 'Great Reset'
An interesting follow-up post could be on how to invest in such a world.
e.g. longer dated US TIPS with real yields of 2-3%?
If you are a US investor, buy 30-year TIPS now. Where else do you get 1.5% real with 100% inflation hedge and very little risk?
But I'll take up that idea, because it is important. Thanks for the suggestion.