Following his re-election, US President Barack Obama almost immediately turned his attention to reining in the US’ rising national debt. In fact, almost all Western countries are implementing policies aimed at reducing — or at least arresting the growth of — the volume of public debt.
In their widely cited paper Growth in a Time of Debt, Kenneth Rogoff and Carmen Reinhart argue that, when government debt exceeds 90 percent of GDP, countries suffer slower economic growth. Many Western countries’ national debt is now dangerously near, and in some cases above, this critical threshold.
Indeed, according to the Organisation for Economic Co-operation and Development, by the end of this year, the US’ national debt/GDP ratio will climb to 108.6 percent. Public debt in the eurozone stands at 99.1 percent of GDP, led by France, where the ratio is expected to reach 105.5 percent and the UK, where it will reach 104.2 percent. Even well disciplined Germany is expected to close in on the 90 percent threshold at 88.5 percent.
Countries can reduce their national debt by narrowing the budget deficit or achieving a primary surplus (the fiscal balance minus interest payments on outstanding debt). This can be accomplished through tax increases, cuts to government spending, faster economic growth or some combination of these components.
When the economy is growing, automatic stabilizers work their magic. As more people work and earn more money, tax liabilities rise and eligibility for government benefits such as unemployment insurance falls. With higher revenues and lower payouts, the budget deficit diminishes.
However, in times of slow economic growth, policymakers’ options are grim. Increasing taxes is not only unpopular, it can be counterproductive, given already-high taxation in many countries. Public support for spending cuts is also difficult to win. As a result, many Western policymakers are seeking alternative solutions — many of which can be classified as financial repression.
Financial repression occurs when governments take measures to channel to themselves funds that, in a deregulated market, would go elsewhere. For example, many governments have implemented regulations for banks and insurance companies that increase the amount of government debt that they own.
Consider the Basel III international banking standards. Among other things, Basel III stipulates that banks do not have to set aside cash against their investments in government bonds with ratings of “AA-” or higher. Moreover, investments in bonds issued by their home governments require no buffer, regardless of the rating.
Meanwhile, Western central banks are using another kind of financial repression by maintaining negative real interest rates (yielding less than the rate of inflation), which enables them to service their debt for free.
The policy rate of the European Central Bank (ECB) stands at 0.75 percent, while the eurozone’s annual inflation rate is 2.5 percent. Likewise, the Bank of England keeps its policy rate at only 0.5 percent, despite an inflation rate that hovers above 2 percent, while in the US, where inflation exceeds 2 percent, the Federal Reserve’s benchmark federal funds rate remains at an historic low of 0 percent to 0.25 percent.
Moreover, given that the ECB, the Bank of England and the Fed are venturing into capital markets — via quantitative easing (QE) in the US and the UK, and the ECB’s “outright monetary transactions” (OMT) program in the eurozone — long-term real interest rates are also negative (the real 30-year interest rate in the US is positive, but barely).
Such tactics, in which banks are nudged, not coerced, into investing in government debt, constitute “soft” financial repression, but governments can go beyond such methods, demanding that financial institutions maintain or increase their holdings of government debt, as the UK’s Financial Services Authority did in 2009.
Similarly, last year, Spanish banks increased their lending to the government by almost 15 percent, even though private-sector lending contracted and the Spanish government became less creditworthy.
A senior Italian banker once said that Italian banks would be hanged by the Italian Ministry of Finance if they sold any of their government-debt holdings and a Portuguese banker declared that, while banks should reduce their exposure to risky government bonds, government pressure to buy more was overwhelming.
In addition, in many countries, including France, Ireland and Portugal, governments have raided pension funds in order to finance their budget deficits. The UK is poised to take similar action, “allowing” local government pension funds to invest in infrastructure projects.
Direct or indirect monetary financing of budget deficits used to rank among the gravest sins that a central bank could commit. QE and OMT are simply new incarnations of this old transgression.
Such central-bank policies, together with Basel III, mean that financial repression will likely define the economic landscape for at least another decade.
Sylvester Eijffinger is professor of financial economics at Tilburg University in the Netherlands. Edin Mujagic is a monetary economist at Tilburg University.
Copyright: Project Syndicate
Recently, China launched another diplomatic offensive against Taiwan, improperly linking its “one China principle” with UN General Assembly Resolution 2758 to constrain Taiwan’s diplomatic space. After Taiwan’s presidential election on Jan. 13, China persuaded Nauru to sever diplomatic ties with Taiwan. Nauru cited Resolution 2758 in its declaration of the diplomatic break. Subsequently, during the WHO Executive Board meeting that month, Beijing rallied countries including Venezuela, Zimbabwe, Belarus, Egypt, Nicaragua, Sri Lanka, Laos, Russia, Syria and Pakistan to reiterate the “one China principle” in their statements, and assert that “Resolution 2758 has settled the status of Taiwan” to hinder Taiwan’s
Singaporean Prime Minister Lee Hsien Loong’s (李顯龍) decision to step down after 19 years and hand power to his deputy, Lawrence Wong (黃循財), on May 15 was expected — though, perhaps, not so soon. Most political analysts had been eyeing an end-of-year handover, to ensure more time for Wong to study and shadow the role, ahead of general elections that must be called by November next year. Wong — who is currently both deputy prime minister and minister of finance — would need a combination of fresh ideas, wisdom and experience as he writes the nation’s next chapter. The world that
The past few months have seen tremendous strides in India’s journey to develop a vibrant semiconductor and electronics ecosystem. The nation’s established prowess in information technology (IT) has earned it much-needed revenue and prestige across the globe. Now, through the convergence of engineering talent, supportive government policies, an expanding market and technologically adaptive entrepreneurship, India is striving to become part of global electronics and semiconductor supply chains. Indian Prime Minister Narendra Modi’s Vision of “Make in India” and “Design in India” has been the guiding force behind the government’s incentive schemes that span skilling, design, fabrication, assembly, testing and packaging, and
As former president Ma Ying-jeou (馬英九) wrapped up his visit to the People’s Republic of China, he received his share of attention. Certainly, the trip must be seen within the full context of Ma’s life, that is, his eight-year presidency, the Sunflower movement and his failed Economic Cooperation Framework Agreement, as well as his eight years as Taipei mayor with its posturing, accusations of money laundering, and ups and downs. Through all that, basic questions stand out: “What drives Ma? What is his end game?” Having observed and commented on Ma for decades, it is all ironically reminiscent of former US president Harry