Anatole Kaletsky

Confessions of a deficit denier

By Anatole Kaletsky
November 15, 2012

Here is a confession: I am a deficit denier.

To say this in respectable society is to be reviled as a self-serving rogue, worse than someone who denies climate change. Yet whenever I see a budget crisis — the U.S. falling off a fiscal cliff; austerity protests paralyzing Europe; Britain’s governing coalition tearing itself apart over missed budget targets -– I cannot resist the same conclusion: These countries’ leaders should take a deep breath, relax and stop worrying about deficits.

For there is actually no fiscal crisis in the United States, Britain or most European countries — including even Italy and Spain. Greece is another matter. But the very specific Greek disaster hardly justifies a generalized global panic about all government debts.

Consider some statistical facts. Interest rates are lower today than at any time in history, meaning that governments find it easier to borrow money than ever before. This hardly suggests impending bankruptcy.

Especially since the investors falling all over themselves to lend them money are not naïve widows and orphans or government-controlled central banks. Rather, hedge funds, billionaires and the sovereign-wealth funds of financially sophisticated nations like Norway and Singapore have all poured far more money into government bonds than into shares, property or gold over the past three years.

Why are sophisticated investors unmoved by the deficit panic? Because they know that governments, at least outside the euro zone, are nowhere near bankruptcy. In fact, debt levels are not dangerously high. The U.S. government net debt is expected to stabilize at 89 percent of gross domestic product from 2014 to 2017, according to the International Monetary Fund, even if all the Bush tax cuts were extended and without any of the spending cuts assumed in the fiscal cliff. Similar stable debt levels are projected for Germany, France, Italy, Britain and even Spain. Assuming debt levels do stabilize in the rage of 85 percent to 100 percent of GDP, these won’t be worryingly high. U.S. national debt peaked at 110 percent of GDP in the late 1940s, and Britain’s was even higher. But nobody worried much about national bankruptcy after World War II – and the confidence proved justified. For the U.S. and Britain both enjoyed their strongest economic performance in the two decades after their deficits peaked at more than 100 percent of GDP.

The U.S. and British fiscal situations today are even less troubling — partly because two-thirds of the government debt issued since the 2008 crisis has been bought by the central banks. Since the Federal Reserve and the Bank of England are part of their respective governments, the bonds they own represent debts the government owes to itself.

Once central bank holdings are consolidated within the government, the true burden of debt owed to the public falls to roughly 65 percent of GDP in both Britain and the United States.

Britain belatedly began to acknowledge this fiscal reality in a path-breaking move last Friday, when the Treasury decided to credit back to itself the interest payments it had been theoretically making to the Bank of England. At a stroke, this will slash £35 billion off government deficits and spending.

The next logical step might be to cancel completely the £375 billion worth of bonds held by the Bank of England, thereby reducing reported debt by some 25 percent of GDP.

Why do politicians resist such obvious reforms, which could effortlessly reduce debt burdens and dispel public fears about national bankruptcy? There are four reasons – three respectable and one less so.

First, there was a point in the 2008-09 crisis when borrowing really did get scarily out of control. Genuine fiscal disasters seemed possible in 2009 unless tax revenues steadily recovered. That recovery happened quickly in the United States, Germany, China and other countries that refrained from excessive tax hikes or public spending cuts — relying instead on economic growth to bring deficits under control. In Britain, Spain and Italy, by contrast, over-zealous deficit reduction proved counterproductive and public debt burdens increased faster because austerity strangled economic growth.

A second legitimate worry is that all advanced economies had genuine fiscal problems caused by demographics and escalating health-care costs. But these long-term challenges have nothing to do with the huge, but temporary, deficits caused by the 2008 global financial crisis.

The tough decisions required to address demographic challenges – supply-side reforms to limit health-care costs, raising retirement ages and less generous indexation of pensions– must be made in any case, whether current debt levels were 40 percent or 80 percent of GDP. But the timeline of these fiscal challenges runs in decades. There’s no need for emergency actions that aggravate economic weakness and make fiscal prospects even worse.

A third respectable reason for political anxiety is fear of inflation. Large deficits can only be financed at low interest rates if central banks lend to governments on a huge scale.

When these Quantitative Easing programs started, there were fears that they might cause inflation and amount to currency “debasement.” But these inflation concerns proved unfounded – not surprising, since the money printed by central banks to finance governments was scarcely enough to offset the shrinkage of the money supply caused by deleveraging commercial banks.

With inflationary fears laid to rest, one might have expected a calmer attitude about deficits by now. Were it not for a fourth, less respectable, reason for fiscal panic. Conservative politicians, opposed in principle to all government, exploited deficits to demand cuts in government spending, while denying that higher taxes could play any role in reducing deficits.

But now the tables are turned. After the November 6 U.S. election deficit phobia no longer implies drastic cutbacks in public spending. Instead, it is becoming the main argument for higher taxes — especially on the rich.

Once this becomes obvious, I expect to welcome many Tea Partiers and tax lobbyist to the ranks of deficit deniers

PHOTO: Britain’s Prime Minister Cameron arrives to attend an EU summit at the European Council headquarters in Brussels, October 18, 2012. REUTERS/Eric Vidal

23 comments so far | RSS Comments RSS

Great viewpoint. Very upbeat.

Posted by tmc | Report as abusive

U.S. national debt peaked at 110 percent of GDP in the late 1940s, and Britain’s was even higher. But nobody worried much about national bankruptcy after World War II – and the confidence proved justified. For the U.S. and Britain both enjoyed their strongest economic performance in the two decades after their deficits peaked at more than 100 percent of GDP.

Hmmm, yeah, we easily worked off the large deficits through economic expansion and tax flows from that expansion. Could that expansion have anything to do with the fact that the U.S. had the only advanced economy left after the war to supply the massive rebuilding of the rest of the world? What alternatives to the U.S. economy are available now due to the massive overcapacity created due to overspending? How will more overspending happen again when there is the debt load created in the previous headlong dash of overspending?

I forgot, all that is needed is more government spending since the public is in debt up to its eyeballs. Better yet, just print more money to buy that debt since no one other than the poor or middle class or fixed income retired are harmed by low rates allowing no safe rate of return on their money. How silly of me, those people could make a better return through buying of re-inflated assets (you know the kind of assets that were over-inflated due to the over-spending before this crisis began).

The Bozo who wrote this article believes debt is of no consequence; that the crisis brought on by excess debt was of no import other than to the silly people who had their financial lives destroyed by it. What foolish babble from a relativist academic who gave no thought to any moral context. This type of person only sees simple careless solutions rather than the immoral actions that brought us to needing a solution.

Posted by keebo | Report as abusive

The hysteria about the national debt reminds me of a lynch mob. While there hasn’t been a day in the history of the United States when their haven’t been those screaming that the sky is falling because of the national debt, the sky has never fallen. But now there is a much larger, louder mob that has been egged on by a massive rabble rousing campaign orchestrated in large part by those who feel that they must make Obama fail.

That being said we must be careful about how we spend public money. Entitlements, be they government handouts, public employees that can’t be fired but get huge pensions, or tax breaks for the rich (call them billionaire entitlements, hedge fund entitlements, etc) are bad stuff that will come back to haunt us. Good stuff is building up infrastructure, education, public heath and so on. The biggest threat to our long term success as a nation right now is not the national debt, but our draconian cuts to education.

Posted by QuietThinker | Report as abusive

This economic “Pollyanna” espouses a “What, me worry?” view right out of Mad Magazine. Are many this unknowing?

I’m sure many passengers on the Titanic did not understand why and how they were immediately doomed following the collision with the iceberg (underwater, and unseen). Yet the water rushing in relentlessly and progressively destroyed necessary stability and buoyancy such that over time the ship slipped beneath the waves. The ship was already sunk even as it still floated.

Few taxpayers are aware that the U.S. has NEVER retired the huge debt it ran up during WW II. Why don’t we hear about that? Because successive legions of politicians have simply and steadily inflated that dollar amount to insignificance. It has simply ceased to “matter”.

So, today, there are more and more of those who would intentionally debase our currency more and more via inflation. That house I bought in 1965 for $22,000 and sold in 1988 for $179,000 did NOT “appreciate” $157,000.

In 1988 it took $82,622.22 to buy what one could buy for $22,000 in 1965. So $179,000 – $82,622.22 = $96,377,78 was appreciation. But had I not reinvested it in real estate I would have been required to pay taxes on $60,622.22 of pure inflation which purchasing power I never enjoyed. Slick trick, politicians!

Today many of my peers who scrimped and saved over their working lives to accumulate a “nest egg” sufficient to provide them comfort and security in their old age find, instead, that inflation raises the price of food, fuel, vehicle, medication and medical services FAR faster than the meager interest such financial assets earn.

In short, politicians do what they have always done. If they don’t get what they want from taxpayers one way or another, they “change the rules” so they do.

Going back to the Titanic, the American dollar has become the de facto “currency of the world” only because it is the “least dirty shirt”. No one knows when or how this will cease to be the case, but the stability of the dollar will look just fine right up until the moment it rolls over and sinks to the bottom of the financial abyss.

All those dollars that have been printed but held back “in reserve” will suddenly explode from government and private coffers to inundate the world’s financial systems. The scenario will be much like the financial convulsions of Germany’s Weimar Republic following World War I and the effect in the longer term may well be as bad.

What, me worry?

Posted by OneOfTheSheep | Report as abusive

It seems to me that national debt is more of a demographic problem than a spending problem, at least if spending isn’t completely out of control. Countries like Greece, Italy, and Spain, for example, may have real difficulties maintaining their debt because their populations are falling. The United States and Canada, for example, do not face the same difficulty. The United States, with a little self control, will be able to manage its debt in the future. Yes, there really is a need for caution, but the future is not as dire as it seems. There is a lot of politics involved in this debate. A little spending at a time such as this is not a bad thing at all.

Posted by canadianeh65 | Report as abusive

People forget that governments don’t work by the same rules they force us to obey financially. They MAKE the rules and can easily change them. The US can easily re-institute another Bank of the United States, charge the Federal Reserve with fraud and leave the debt with them. It should always be remembered that the mentality of government is “We control everything within this boundary. We can do anything our minds can imagine and back it by the labor of the population, by force if necessary.” I fear the political and financial union of the BRICS more than I do this financial cliff nonsense we’re being fed.

OneOfTheSheep’s last paragraph is a good example as well.

Posted by LysanderTucker | Report as abusive

Thank you, Anatole Kaletsky, for a refreshing and logical perspective. I also appreciate how clearly and succinctly you put together all of the most important factors at play. I have enjoyed reading the comments and feel compelled to add to the conversation as follows:

@canadianeh65, you bring up a refreshingly good point. Since Obama’s reelection, Reuter’s commenters are cluttering things up with their trickle-down sillyness and making healthy discussions like this hard to find. However, it’s not just a demographic problem that Italy and Spain face, it’s an interest rate control problem, too. Japan, for example, is managing their terrific debt and declining population. Low interest rates have a lot to do with that. With their own currency and respectable economy, they are in a position to manage their interest rates and debt– unlike Greece. Italy and Spain, like Greece do not control their own currency. They were managing their debt well enough until the market demanded higher returns (which forced the EU to step in). But declining populations and the likely drag on GDP could once again make servicing the debt harder and more expensive.

@keebo, the “Bozo who wrote this article” never indicated that debt was of no consequence to individuals. What Anatole Kaletsky was saying is that the current debt levels are not as urgent as some pundits would have us believe in the context of the larger macro-economic situation we are in. Maybe you are just confused between micro and macro economics. This could be due to your peculiar definition of morality. Here again, maybe you’re confused between the purveyors of complicated financial instruments and Congress. Actually, I’m a little confused about the difference in morality between those two, too!

@OneOfTheSheep, I found it telling that most of your arguments were effectively addressed with facts and compelling logic by Anatole Kaletsky in his well written opinion. Bringing them up again without any new facts was unconventional. For example, your opening sentence where you employ name-calling, is a tactic rarely employed by respected adults. I do admire your poetic reference to the Titanic, though. Still, your belief in piles of money on the verge of flooding the markets illustrates a simplistic but creative understanding of the situation. Although your poetry isn’t fully developed, yet, it’s probably best to stick to that and leave the economic analysis to those with the faculties to address them head on.

@LysanderTucker, I find your personification of governments disturbing– especially your statement that they, “can do anything our minds can imagine”. Clearly you must live in terror. All I can say is I’m sorry for you.

My final thought is to read the article once again. It is a beautiful thing that could hardly be improved upon.

Posted by LEEDAP | Report as abusive

I think it’s helpful for those of us old enough to recall the deficit panic of the late 80′s and early 1990′s. Organizations such as the Concord coalition were founded to advocate for sharp spending reductions, and Ross Perot got an astonishing 19% of the vote on a third party ticket for US President, largely on the basis of deficit fears. A counter was displayed in Times Square to try to scare us into action. Luckily, President Clinton did not succumb to the panic, and instead pushed through a relatively minor tax increase and instituted a pay-as-you-go policy. Voila, a few years later those deficits that seemed to stretch out into eternity were not only gone, but we had a surplus. Interestingly, those who angst about deficits seem to be exactly the same people who think we should drastically cut government spending. Seems pretty darned convenient to me.

Posted by Sanity-Monger | Report as abusive

“When these Quantitative Easing programs started, there were fears that they might cause inflation and amount to currency “debasement.” But these inflation concerns proved unfounded…”

Erm, didn’t inflation peak at 5.2% not 12 months or so ago?? Isn’t it forecast to be above the 2% target for the next year or more? When was it that inflation was last actually below 2%? You’d have to go back years.

As far as I can tell, there’s been an unofficial BOE/UK GOV policy of letting inflation rip in order to make our economy more internationally competitive. Quantitive easing and super loose monetary policy have been bent to this end.

Posted by kevinhoqie | Report as abusive

Leedap, you too bring up some good points. Japan’s debt is relatively manageable because it is held almost entirely by Japanese citizens. The Japanese have a very unique national character, and that will allow the government to carry on spending for a long time yet. This world debt problem is all in how we perceive it. The Japanese have given complete support to their government in much worse times than these. Debt is only a problem when the debt holders start to worry about getting their money back. Japan’s debt holders are the Japanese themselves, and I think things will have to get much, much worse before the Japanese government starts to have trouble convincing Japanese investors that their debt is not safe.

You brought up the key issue in Europe: these countries do not control their own currency. That is the relief valve, and they cannot use it. This problem would be over and done with by now if they could have devalued their currency as has been done in the past. They are stuck trying to do this the hard way, and unless major concessions are given by the ‘healthy’ portion of the EU, these countries will be forced to leave the monetary union. That’s the real issue here. It’s largely political, and that is what makes it so difficult.

Posted by canadianeh65 | Report as abusive

Comparing are debt situation to after WWII is ignorant. After the war the country was Industrializing with a young population and No competition since Europe was destroyed.
Now we are facing an aging population at a time of de-industrialization.
Furthermore I can think of no new mass employment industry which will put people to work like tech did in the 90′s or housing in 20′s. The magical “next be thing” that will change the employment picture is hear it’s tech efficiency and it is destroying good paying jobs not making them.
Instead of ignoring debt and saying things will get better we should ask our selves a simple and serious question. If you can produce all the goods and services you need with 75% of the labor force what do you do with the rest of the people?

Posted by straydog | Report as abusive

What a ridiculous argument- “there is no fiscal cliff because interest rates have never been lower”. Did this author receive a degree in economics from a correspondence school? Interest rates are lower because sovereign governments are printing money and devauling their currency which if we ever do reach a recovery will result in massive inflation and economic collapse.

Posted by jkk1943 | Report as abusive

Actually, we should be running surpluses to pay down the debt and prepare ourselves for the entitlement tidal wave that is coming, but instead we “only” ran a deficit of 7.0 percent of GDP.

The worst part about it is that the rationalization for deficit spending is Keynesian policies that continue to fail wherever they are tried.

Posted by MarkCancellieri | Report as abusive

Mr. Kaletsky is indeed an award winning journalist. But he also denied there was a recession in 2008. And we all know how that proclamation turned out….

Posted by elder_bear | Report as abusive

‘I expect to welcome many Tea Partiers and tax lobbyist to the ranks of deficit deniers’ – You must be kidding! Tea Partiers like many republicans are highly intellectually challenged. They won’t undertand your argument or logic.

They have the talent to completely ignore facts. They just know in their gut that if the government borrows money, it goes out of their pocket and into the pockets of some lazy, non-white person who probably does not speak English. The only solution to such a problem is to drastically cut the budget even if it causes a depression.

Posted by injuntrouble | Report as abusive

Climate change denial is silly but denying the political goals and agenda of recent climate evangelicals is very rational.

You might want to reconsider. You might be in denial if you think that the decades long – recently accelerated – global debt accumulation is not a serious problem.

Interest rates are low as you point out possibly because this economic crisis has a banking / financial element embedded and not because they’re signaling that all is well. As you point out further on in your column the low interest rates are probably connected to the widespread system wide massive deleveraging forced on the banks by circumstances and regulators.

Banks and central banks lent so much to sovereign borrowers at least in part because global regulators via Basal back in the early 90;s fixed the relative capital costs so low thus encouraging excessive debt creation and enabling excessive deficit spending on rising government employee salaries and benefits not to mention entitlements. Using the current low interest rates to justify even more borrowing to feed these problems is shortsighted and foolish.

And then taking comfort from the fact that governments are borrowing from themselves i.e. monetizing is again foolish and short sighted – this sort of behavior has never ended well. This time is no different. Any breathing space we have should be used to work towards solutions before more drastic measures are forced upon us by circumstances. Simply refusing to acknowledge the problem and dealing with it while we still can is a huge mistake.

What’s needed is not a calmer attitude toward deficits, but an understanding of their causes (too much government spending and commitments on entitlements) and a systematic cure applied. We need austerity applied to the public sector not the private.

Governments beyond certain minimum needs cannot create wealth. It’s the private side that is the prime generator and sustainer of wealth creation and our growing standard of living providing the resources to divert to sustain necessary government functions and provide for the less fortunate.

Posted by Danioton | Report as abusive

I find this article to be alarmingly dismissive of the problems of debt. We may not be in a “crisis”, but that does not mean we don’t have a serious problem.

Within a few years, the US government will owe $20 trillion dollars. Most of this debt has a maturity of 10 years or less. When rates return to normal levels, say 5%, the government will be paying $1 trillion per year in interest. That’s a trillion dollars – due every year – that can’t be spent on infrastructure, social programs, defense, or tax cuts. It makes every other problem enormously more difficult to tackle.

Politicians fail miserably at Keynesian economics. Keynes said governments should run deficits when times are bad, and surpluses when times are good. We seem to have the deficit part figured out, but every time there is a whiff of a surplus they blow the money on new government spending or tax cuts.

Posted by RogerMKE | Report as abusive

Here is another perspective for all you Kalesky cool aid drinkers.

http://www.spiegel.de/international/busi ness/playing-poker-with-trillions-a-pris on-of-debt-on-both-sides-of-the-atlantic -a-867404.html

Oh Yeah, ask Mr. Kalesky how well he predicted the 2008-09 financial crisis in the first place (remember that debt bubble), and his insistence at that time that the housing market and the credit bubble in the U.S. was not a big problem at all.

Posted by ProgresConserv | Report as abusive

Kaletsky’s arguments are misleading and/or just plain wrong:
“The U.S. government net debt is expected to stabilize at 89 percent of gross domestic product from 2014 to 2017, according to the International Monetary Fund.”
-> The IMF has never gotten anything right…ever. Where does “stabilize” come from if GDP is at stall speed and fiscal deficits are above $1 trillion?
-> An honest calculation of “government debt” must include entitlement liabilities like Medicare and Social Security, and they are massive.
“Since the Federal Reserve and the Bank of England are part of their respective governments, the bonds they own represent debts the government owes to itself.”
-> This is just plain false. The Fed is not part of the U.S. government. It is owned by global banks.
“…since the money printed by central banks to finance governments was scarcely enough to offset the shrinkage of the money supply caused by deleveraging commercial banks.”
-> Commercial banks have not delevered. Commercial bank assets are up in price but liabilities are not lower.
Liberal MMT groupies like this guy are wolves in sheep clothing.

Posted by ReeseBobby | Report as abusive

Simple point which I think goes to credibility…..6th paragraph reference to the Fed being part of the US Govt??????…The Fed is a private bank that does not submit tax returns….and does not disclose who the shareholders are????? Chew on that LEEDAP!

Posted by Aussiecol | Report as abusive

This is a long way of saying that the next bubble is in government bonds.

Posted by DeanPlassaras | Report as abusive

“For there is actually no fiscal crisis in the United States, Britain or most European countries — including even Italy and Spain”
http://www.nytimes.com/2012/10/27/busine ss/global/jobs-data-underscore-rajoys-wo es.html?adxnnl=1&adxnnlx=1353498756-t9Cq G1VFHO4+CYTJmOgSeg&_r=0&gwh=8F2745469CF0 9D76E596A64F5F6449DA
I guess that 25% unemployment in Spain is not a problem.
So….if just creating money would solve all our problems, WHY DON’T WE DO THAT???
Oh yeah, in decomcracies….people are fooled and vote against their own best interests…..hmmm….but WE KNOW THAT NEVER HAPPENS WITH MARKETS!

“Especially since the investors falling all over themselves to lend them money are not naïve widows and orphans or government-controlled central banks.”

REALLY!??! REALLY!!?? After Fitch, S&P, and Moodys are revealed to be incompetent, venal, and criminal, Mr. Kaletsky’s arguement is to believe in the wisdom of the bond market? Yeah, those bond buyers are not naive….they know the government believes no bond holder should EVER take a loss…
http://www.guardian.co.uk/business/2011/ aug/22/ratings-agencies-conflict-of-inte rest
http://www.cfr.org/united-states/credit- rating-controversy/p22328

After all the problems with MBSs, CDOs, the 2000 Stock bubble, the housing bubble,etcetera, Mr. Kaletsky’s arguement is to believe in the market??? We are doomed…

Posted by fresnodan | Report as abusive

Interest rates are this low because central banks have made it their business to keep them this way. Suggesting that low interest rates indicate soundness of the economy is unsound foolery of the highest order eclipsed only by such stalwarts of economic theology as perfect pricing, information and rationality in human decision cycles.

Posted by zhmileskendig | Report as abusive

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