Government Debt Dynamics - A Calculator
December 12, 2011 9:08 PM Subscribe
"GOVERNMENT debt dynamics, once an esoteric subject of interest only to macroeconomists, are suddenly in vogue. With Greece flirting with default, Italy's bond yields rising fast, and America's government bonds losing their AAA status, public-debt burdens have become dinner-party talk. Our interactive chart shows current IMF forecasts but also allows you to input some basic economic assumptions to see where general government debt as a percentage of GDP might head."
Government debt dynamics have not been an esoteric subject of interest only to macro economists. If you lived in Croatia in the 1990s or bunch of African countries in the 2000s it was far more than an academic question.
Here is a useful but incomplete list of sovereign defaults.
There are more than 20 sovereign defaults in the 2000s alone.
Sovereign debt default has only been a rare occurrence in the developed world since the war.
posted by sien at 9:55 PM on December 12, 2011
Here is a useful but incomplete list of sovereign defaults.
There are more than 20 sovereign defaults in the 2000s alone.
Sovereign debt default has only been a rare occurrence in the developed world since the war.
posted by sien at 9:55 PM on December 12, 2011
So, long lunch and a trip to coin shop for some gold eagles tomorrow, huh?
posted by codswallop at 9:58 PM on December 12, 2011
posted by codswallop at 9:58 PM on December 12, 2011
Help me out with a little Economist to English translation here: "in vogue" means, roughly, "soon likely to impoverish millions of ordinary people"? I mean, only to the Economist could the Eurozone crisis seem like an inscrutable fad interest, like some new style of hat rather than something that people naturally take an interest in when it appears to be threatening their entire lives' stability. I get the sense these people would've been running humorous comparison reviews of different styles of currency-wheelbarrow in '20s Weimar.
posted by RogerB at 10:14 PM on December 12, 2011 [3 favorites]
posted by RogerB at 10:14 PM on December 12, 2011 [3 favorites]
It's the Economist. It's written for people who win when you win, and win when you lose.
posted by mark242 at 10:34 PM on December 12, 2011 [2 favorites]
posted by mark242 at 10:34 PM on December 12, 2011 [2 favorites]
Playing with the widget just reinforces that I really have no idea what any of this terminology means.
Anyways, looking at the list of countries that have defaulted (and provinces, hooray my home province of Alberta which defaulted in 1935!), many of them have defaulted many many times. So, what are the consequences of a default really? I assume the economy goes to crap for a while, frogs rain from the sky and the rivers run red with blood, but after all that...then what happens?
posted by selenized at 10:48 PM on December 12, 2011
Anyways, looking at the list of countries that have defaulted (and provinces, hooray my home province of Alberta which defaulted in 1935!), many of them have defaulted many many times. So, what are the consequences of a default really? I assume the economy goes to crap for a while, frogs rain from the sky and the rivers run red with blood, but after all that...then what happens?
posted by selenized at 10:48 PM on December 12, 2011
I assume the economy goes to crap for a while, frogs rain from the sky and the rivers run red with blood, but after all that...then what happens?
Not all that much, apparently. You would expect borrowing costs to be higher for a while, but not that long.
posted by delmoi at 11:11 PM on December 12, 2011 [1 favorite]
Not all that much, apparently. You would expect borrowing costs to be higher for a while, but not that long.
posted by delmoi at 11:11 PM on December 12, 2011 [1 favorite]
Also, the US government lost it's tripple A rating not because people think it won't be able to pay loans back, but due to the 'political instability' we saw during the debt ceiling debate when republicans basically held bond payments ransom.
posted by delmoi at 11:13 PM on December 12, 2011 [1 favorite]
posted by delmoi at 11:13 PM on December 12, 2011 [1 favorite]
I assume the economy goes to crap for a while, frogs rain from the sky and the rivers run red with blood, but after all that...then what happens?
Every default is different so speculating what happens after a default is next to impossible. You'll often see the currency drop like a stone. Once the currency has been debased enough industry starts to rebuild itself on the back of increased competitiveness in the international marketplace. To put it simply, the economy gets back to basics. Luxury goods and travel will often be out of reach of the average citizen until the currency becomes appreciably stronger and wages start to rise. Strong growth on the back of heavy exports will often drive core inflation at a fairly strong clip too and it could hit double digits during this time.
However since Greece is in the Euro none of this applies in the slightest. If it remains in the Euro, Greece would have to undergo internal devaluation which is both next to impossible (since social unrest accompanies savage wage cuts which further sends industry into decline) and contractionary which is just economic fucking suicide.
posted by Talez at 11:15 PM on December 12, 2011 [1 favorite]
Every default is different so speculating what happens after a default is next to impossible. You'll often see the currency drop like a stone. Once the currency has been debased enough industry starts to rebuild itself on the back of increased competitiveness in the international marketplace. To put it simply, the economy gets back to basics. Luxury goods and travel will often be out of reach of the average citizen until the currency becomes appreciably stronger and wages start to rise. Strong growth on the back of heavy exports will often drive core inflation at a fairly strong clip too and it could hit double digits during this time.
However since Greece is in the Euro none of this applies in the slightest. If it remains in the Euro, Greece would have to undergo internal devaluation which is both next to impossible (since social unrest accompanies savage wage cuts which further sends industry into decline) and contractionary which is just economic fucking suicide.
posted by Talez at 11:15 PM on December 12, 2011 [1 favorite]
So, what are the consequences of a default really?
Typically, the government is no longer allowed to borrow. In situations where it was borrowing heavily, the sudden cutoff is like setting off a bomb in the economy. It was fooled into thinking there was more wealth available than there really was, and the longer the deficit spending has been going on, the more of the economy will be oriented around serving that temporary demand, which suddenly vanishes, leaving that whole segment of the economy to wither and die away. If the deficits were large and lasted for a long time, this can be a LOT of economic damage.... but this is just getting rid of false growth.
This can cause a circular collapse, where the reduction in borrowing chokes the economy, which chokes government revenues, which starves spending, which again chokes the economy, and so on... it can take quite awhile for that vicious cycle to stop. Living standards drop, sometimes a very great deal, but once the system finds the bottom, they then start climbing again. People who were formerly dependent on the government's largesse are hurt the worst, but almost everyone is hurt, because the economy was not actually as large as everyone thought it was. It was being driven by unsustainable demand.
In essence, economies in deficit spending are sucking extra resources out of the world economy. If those resources are used in smart ways, for investment that's actually cashflow positive, this can be a huge net benefit for everyone involved, both the lenders and the borrowers. But governments who do this don't default, because they're generating wealth to repay the loans they took. There's nothing inherently wrong with government debt, if it's used in smart ways.
However, as we see all over the world, it is extremely common for government borrowing to be used in wealth-negative or even outright wealth-destructive ways, leaving a huge overhang of debt with no productive capacity to repay it. It's always, always, always popular with the voters to live beyond a country's means. The masses, it has been said, will vote themselves bread and circuses, whether the state can afford them or not.
That's why we're supposed to have adult supervision, to prevent exactly the kind of insane runups of debt you see in so many First World economies. Government debt is the most radioactive and toxic kind you can possibly imagine, because you can't default without horrific consequences, and it's one of the only forms of debt that can cross generations -- you can bind your children to pay, for the rest of their lives, for your healthcare in the present. So what the hell are they supposed to use for THEIR healthcare?
Using public debt for consumptive (as opposed to investment) spending is probably the greatest sin any government can commit. It's a crime against those will come after, forcing them to pay for things that didn't benefit them. It's a lot like living on caviar and champagne for the last ten years of your life, and passing the debt to your children and grandchildren.
posted by Malor at 11:34 PM on December 12, 2011 [8 favorites]
Typically, the government is no longer allowed to borrow. In situations where it was borrowing heavily, the sudden cutoff is like setting off a bomb in the economy. It was fooled into thinking there was more wealth available than there really was, and the longer the deficit spending has been going on, the more of the economy will be oriented around serving that temporary demand, which suddenly vanishes, leaving that whole segment of the economy to wither and die away. If the deficits were large and lasted for a long time, this can be a LOT of economic damage.... but this is just getting rid of false growth.
This can cause a circular collapse, where the reduction in borrowing chokes the economy, which chokes government revenues, which starves spending, which again chokes the economy, and so on... it can take quite awhile for that vicious cycle to stop. Living standards drop, sometimes a very great deal, but once the system finds the bottom, they then start climbing again. People who were formerly dependent on the government's largesse are hurt the worst, but almost everyone is hurt, because the economy was not actually as large as everyone thought it was. It was being driven by unsustainable demand.
In essence, economies in deficit spending are sucking extra resources out of the world economy. If those resources are used in smart ways, for investment that's actually cashflow positive, this can be a huge net benefit for everyone involved, both the lenders and the borrowers. But governments who do this don't default, because they're generating wealth to repay the loans they took. There's nothing inherently wrong with government debt, if it's used in smart ways.
However, as we see all over the world, it is extremely common for government borrowing to be used in wealth-negative or even outright wealth-destructive ways, leaving a huge overhang of debt with no productive capacity to repay it. It's always, always, always popular with the voters to live beyond a country's means. The masses, it has been said, will vote themselves bread and circuses, whether the state can afford them or not.
That's why we're supposed to have adult supervision, to prevent exactly the kind of insane runups of debt you see in so many First World economies. Government debt is the most radioactive and toxic kind you can possibly imagine, because you can't default without horrific consequences, and it's one of the only forms of debt that can cross generations -- you can bind your children to pay, for the rest of their lives, for your healthcare in the present. So what the hell are they supposed to use for THEIR healthcare?
Using public debt for consumptive (as opposed to investment) spending is probably the greatest sin any government can commit. It's a crime against those will come after, forcing them to pay for things that didn't benefit them. It's a lot like living on caviar and champagne for the last ten years of your life, and passing the debt to your children and grandchildren.
posted by Malor at 11:34 PM on December 12, 2011 [8 favorites]
I should qualify that a bit:
"...probably the greatest economic sin any government can commit." There's a long list of things that are worse.
posted by Malor at 11:44 PM on December 12, 2011
"...probably the greatest economic sin any government can commit." There's a long list of things that are worse.
posted by Malor at 11:44 PM on December 12, 2011
That's why we're supposed to have adult supervision, to prevent exactly the kind of insane runups of debt you see in so many First World economies. Government debt is the most radioactive and toxic kind you can possibly imagine, because you can't default without horrific consequences, and it's one of the only forms of debt that can cross generationsUh huh... where is that hyperinflation you said we were supposed to have after 2008, by the way? commodity prices have been dropping since may.
posted by delmoi at 12:11 AM on December 13, 2011 [1 favorite]
Delmoi, quit misrepresenting my position because you don't like it. I have consistently and always said that we must either have a deflationary crash or a hyperinflationary runaway. Either outcome is possible. One or the other must happen, because we are living beyond our means in a big way.
I'm personally betting on inflation, because I figure with the way the Fed is playing Calvinball with the monetary system, they can win a war against deflation. But we're likely to have one more big deflationary impulse when the Chinese bubble pops, which may actually be starting to happen now, and then it'll be wild inflation from then on.
But neither of these things happens overnight. Even Zimbabwe's tiny economy took a number of years to reach true hyperinflation. It will take us quite a bit longer.... you do not turn a supertanker on a dime. But even as massive and productive as our economy is, if you fuck with the money deeply enough and for long enough, it can be destroyed.
posted by Malor at 12:52 AM on December 13, 2011 [1 favorite]
I'm personally betting on inflation, because I figure with the way the Fed is playing Calvinball with the monetary system, they can win a war against deflation. But we're likely to have one more big deflationary impulse when the Chinese bubble pops, which may actually be starting to happen now, and then it'll be wild inflation from then on.
But neither of these things happens overnight. Even Zimbabwe's tiny economy took a number of years to reach true hyperinflation. It will take us quite a bit longer.... you do not turn a supertanker on a dime. But even as massive and productive as our economy is, if you fuck with the money deeply enough and for long enough, it can be destroyed.
posted by Malor at 12:52 AM on December 13, 2011 [1 favorite]
Using public debt for consumptive (as opposed to investment) spending is probably the greatest sin any government can commit. It's a crime against those will come after, forcing them to pay for things that didn't benefit them. It's a lot like living on caviar and champagne for the last ten years of your life, and passing the debt to your children and grandchildren.
Err: see entire "Capitalism" where prices have no relation to both internal and external costs. We could be playing entierly by the "rules" as they are seen in the current capitalist model, and still be fucking our grandkids, if gas only costs $3/gallon and we can burn our waste and deplete our biosphere.
posted by lalochezia at 6:11 AM on December 13, 2011
Delmoi, quit misrepresenting my position because you don't like it. I have consistently and always said that we must either have a deflationary crash or a hyperinflationary runaway. Either outcome is possible. One or the other must happen, because we are living beyond our means in a big way.Yet, we seem to be having neither, other then minor wage deflation caused by high unemployment.
posted by delmoi at 3:44 AM on December 14, 2011
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posted by mccarty.tim at 9:40 PM on December 12, 2011