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Low inflation and rising global debt: just a coincidence? (2018) [pdf]

2 points by pilingual 5y ago

ephbit 5y ago
Good to see experts from well-respected institutions call out the current problems with monetary policies in the last two decades, while many others seem to be ignoring them. Thinking about modern monetary theory proponents MMT here. One of the several interesting and elsewhere rather seldom heard positions. > Over successive business and financial cycles, all this can contribute to an upward drift in debt levels (Graph). Unless corrected, public finances deteriorate. And monetary policy contributes to a downward trend in interest rates which boosts debt further. The risk of a “debt trap” can become real: the rise in debt makes it harder to raise interest rates towards more normal levels without generating the problems policymakers are trying to avoid. The economy becomes more sensitive to interest rate increases, not least because of their stronger impact on debt service burdens. I think western states/economies are already caught in a spiral of increasing debt, they'll have a really hard time coming out of. Looks like governments will just keep on piling on debt, because all other options are politically difficult.
ephbit 5y ago
Another quote about the development following the global financial crisis GFC. > Once the financial boom turned to bust, they naturally pulled out all the stops to support the economy, just as public finances came under serious strain. Central banks’ concerted efforts arguably avoided a repeat of the Great Depression. Moreover, their subsequent, very accommodative stance helped lay the basis for the global economy’s recovery while contributing to the gradual convergence of inflation towards objectives. Still, with the burden of the recovery largely on central banks’ shoulders, the extraordinary and protracted low interest rates, combined with the unprecedentedly large balance sheets, have been one factor behind the legacy of higher debt that shapes the road ahead. This is deeply ironic: high debt was a key cause of the GFC but, since then, debt has continued to rise globally.
ephbit 5y ago
> How can one deal with the debt mountain? Some ways are definitely better than others. A “solution” sometimes put forward is to reduce the debt through higher inflation. The world has already been there, and it was not a pretty sight. It would make little sense to return to an inflationary era after spending so much effort to escape from it. Once the inflation genie is out of the bottle, it is very hard to get it back in. ... > It would make sense to take advantage of the current favourable economic conjuncture to shift in that direction – all the more so since the room for policy manoeuvre has narrowed considerably relative to pre-crisis. Public sector debt is at a peacetime high. And central bank balance sheets are unprecedentedly large while interest rates remain exceptionally low in both nominal and real (inflation-adjusted) terms. > At a deeper level, shifting in the right direction requires placing a higher weight on the long term. Financial cycles, and the associated vulnerabilities, build up slowly. And the costs of high debt may emerge only after a long time. The incentive to kick the can down the road can prove irresistible. But, however distant it may appear, the future eventually becomes today. At which point, it is too late. --- end of article

2 points by pilingual 5y ago

Good to see experts from well-respected institutions call out the current problems with monetary policies in the last two decades, while many others seem to be ignoring them. Thinking about modern monetary theory proponents MMT here. One of the several interesting and elsewhere rather seldom heard positions. > Over successive business and financial cycles, all this can contribute to an upward drift in debt levels (Graph). Unless corrected, public finances deteriorate. And monetary policy contributes to a downward trend in interest rates which boosts debt further. The risk of a “debt trap” can become real: the rise in debt makes it harder to raise interest rates towards more normal levels without generating the problems policymakers are trying to avoid. The economy becomes more sensitive to interest rate increases, not least because of their stronger impact on debt service burdens. I think western states/economies are already caught in a spiral of increasing debt, they'll have a really hard time coming out of. Looks like governments will just keep on piling on debt, because all other options are politically difficult.

ephbit 5y ago

Another quote about the development following the global financial crisis GFC. > Once the financial boom turned to bust, they naturally pulled out all the stops to support the economy, just as public finances came under serious strain. Central banks’ concerted efforts arguably avoided a repeat of the Great Depression. Moreover, their subsequent, very accommodative stance helped lay the basis for the global economy’s recovery while contributing to the gradual convergence of inflation towards objectives. Still, with the burden of the recovery largely on central banks’ shoulders, the extraordinary and protracted low interest rates, combined with the unprecedentedly large balance sheets, have been one factor behind the legacy of higher debt that shapes the road ahead. This is deeply ironic: high debt was a key cause of the GFC but, since then, debt has continued to rise globally.

ephbit 5y ago

> How can one deal with the debt mountain? Some ways are definitely better than others. A “solution” sometimes put forward is to reduce the debt through higher inflation. The world has already been there, and it was not a pretty sight. It would make little sense to return to an inflationary era after spending so much effort to escape from it. Once the inflation genie is out of the bottle, it is very hard to get it back in. ... > It would make sense to take advantage of the current favourable economic conjuncture to shift in that direction – all the more so since the room for policy manoeuvre has narrowed considerably relative to pre-crisis. Public sector debt is at a peacetime high. And central bank balance sheets are unprecedentedly large while interest rates remain exceptionally low in both nominal and real (inflation-adjusted) terms. > At a deeper level, shifting in the right direction requires placing a higher weight on the long term. Financial cycles, and the associated vulnerabilities, build up slowly. And the costs of high debt may emerge only after a long time. The incentive to kick the can down the road can prove irresistible. But, however distant it may appear, the future eventually becomes today. At which point, it is too late. --- end of article