Public Debt and Economic Recovery

The Struggle to Manage Debt

 

By Christoph Rosenberg

March 1, 2018

Good economic times offer an opportunity to tackle budget deficits

The global economy has a spring in its step. Growth is picking up, and we at the IMF have been ratcheting up our forecasts. Government coffers are filling and, with more people at work, demand for public social support is receding. The fiscal woes of the past decade seem behind us.

But this sunny perspective ignores debt levels that remain close to historic highs and the inevitable end of the cyclical upswing. Estimates of underlying growth potential have hardly budged, and interest rates—the cost of servicing all this debt—are starting to rise, which will eventually make it harder to refinance bonds and loans.

How the government taxes, spends, and manages debt is therefore as hot a political topic as ever. Just look at recent debates in the US Congress and the German coalition talks. While fiscal choices are a matter of politics, recent research and experience can teach us much about the best path forward. The latest edition of F&D looks at these issues through various lenses.

Start with the question of how much debt is too much. Academics and policymakers agree that a general limit—such as the 60 percent of GDP in the EU Maastricht Treaty—no longer makes sense; it doesn’t capture enduringly low interest rates and nominal growth or countries’ complex circumstances or credibility with financial markets. Japan clearly can carry more debt than, say, Egypt. But few deny the urgency of debt that is high and rising.

Low-income economies may be at greatest risk. Traditionally, they borrowed from official creditors at below-market rates. But in recent years, many took advantage of rock-bottom interest rates to load up on commercial debt, leaving them vulnerable to financial market swings. Higher global rates could divert precious budget resources to debt servicing from crucial infrastructure projects and social services. So it is all the more important for these countries to strengthen their tax capacity.

The recent postcrisis experience also holds lessons on when to tackle debt—and when not to. Spending cuts and tax hikes during a recession may only amplify the decline. It is much less painful to revamp the tax and benefit system when the economy is on an upswing and as part of a multiyear adjustment. Research shows that the stimulatory effect of fiscal expansion is weak when the economy is close to capacity. So increasing budget deficits now would be counterproductive in most countries. Conversely, taking actions now to raise budget balances toward their medium-term targets can be achieved at little cost to economic activity.

How best to reduce deficits? A number of best practices have emerged over the years. To raise revenue, simplify the tax code, broaden the tax base, and improve collection capacity. On the spending side, cutting unproductive current expenses (for instance, on an inefficient civil service) and subsidies (for instance, on energy consumption) is the way to go. Growth-enhancing infrastructure investments and crucial social services such as health and education should be maintained. Well-designed fiscal policy can address inequality and stimulate growth.

The time to fix the fiscal roof is now, while the sun is shining. Policymakers should heed the lessons learned and tackle debt on the upswing.

By IMFBlog| 2018-03-01T11:32:50+00:00 March 1st, 2018|Debt Relief, Economic outlook, Economic research, Finance, Financial markets, Fiscal policy, Global Governance, health, inclusive growth, income, Inequality, infrastructure, interest rates, International Monetary Fund, Investment, productivity, Public debt, taxation

 

The Bitcoin future

Fedcoin Will Be ‘Bigger’ Than Bitcoin

Fedcoin doesn’t even exist yet, and yet the Washington Post is already hyping it as the primary cryptocurrency that we will be using in the future.

Do they know something that the rest of us do not?

Just a few days ago, I warned that global central banks could eventually try to take control of the cryptocurrency phenomenon, and so I was deeply alarmed to see the Washington Post publish this sort of an article.

We want cryptocurrencies to stay completely independent, and we definitely do not want the Federal Reserve and other global central banks to start creating their own versions.

Because of course once they create their own versions they will want to start restricting the use of any competitors.

The one thing that could derail the cryptocurrency revolution faster than anything else would be interference by national governments or global central banks.

Unfortunately, now that Bitcoin, Litecoin, Ethereum and other cryptocurrencies are getting so much attention, it is inevitable that the powers that be will make a move.

Over the past few weeks, investors have been flocking to bitcoin, the digital currency whose value has soared by about 2,000 percent in the past year alone. And while many economists are cautioning against excitement about bitcoin — which is caught up in what may be one of the biggest speculative bubbles in history — it’s important to note just how revolutionary the technology may be.

Indeed, the technology underlying bitcoin could fundamentally change the way we think of money.

Professor Harvey goes on to explain that it is “only a matter of time before paper money is phased out”, and that some version of “fedcoin” is inevitable.

The Federal Reserve and other global central banks could just leave us alone and allow us to create our own currencies.

The cryptocurrency revolution is moving along just fine, and there is no need for any sort of interference.

But I have a feeling that the powers that be will eventually manufacture some sort of a “cryptocurrency crisis” if one does not happen naturally.

In the aftermath, they will attempt to introduce some version of “fedcoin”, and many in the general public will be very thankful for the “solution” that the government has provided.

And that day may be closer than we think.  In fact, the U.S. government has already invested millions into cryptocurrency research. To add fuel to the fire, the U.S. government has been rigorously studying Bitcoin for about two years now and instead of fighting Bitcoin, the Feds seem poised to wipe out the U.S. dollar by creating their own digital currency. The National Science Foundation, a U.S. government agency that supports and funds research has awarded $3 million to three U.S. universities for wide-ranging cryptocurrency research.

Cornell, the University of Maryland and the University of California Berkeley will focus on developing new cryptocurrency systems that, according to principal investigator Elaine Shi, will address “pain points” attributed to Bitcoin and other existing networks.

The Federal Reserve is far from alone.  Other global central banks are doing their own research, and the Bank for International Settlements says that “all central banks” may eventually need their own cryptocurrencies. Central banks may one day need to issue their own cryptocurrencies, the Bank for International Settlements said in its latest quarterly review. “Whether or not a central bank should provide a digital alternative to cash is most pressing in countries, such as Sweden, where cash usage is rapidly declining,” the Sunday report said. “But all central banks may eventually have to decide whether issuing retail or wholesale [central bank cryptocurrencies] makes sense in their own context.”

This is going to be a critical phase for the cryptocurrency revolution because the people of the world are going to have to make it exceedingly clear that they do not want central bank cryptocurrencies. Central bank cryptocurrencies would simply be an extension of the current debt-based system that is systematically enslaving humanity.

The thing that makes cryptocurrencies so great is the fact that they are not debt-based and they are allowing humanity to express independence from the current system.

As existing fiat currencies fail, we want there to be independent cryptocurrencies that people can use as an alternative. And we don’t have to just imagine what that would look like.  In fact, it is already happening in Venezuela. But in Venezuela, the collapse of the bolivar has forced locals to turn to alternatives like bitcoin and local community-issued currencies with fixed exchange rates. The rapid erosion of the bolivar’s value made everyday transactions like buying groceries and paying cabbies untenable – customers had to pay with large, cumbersome stacks of bolivars that were difficult to transport. Patricia Laya, a Venezuela-based reporter, tweeted a photo of the 5,000 bolivars – the maximum amount – she was able to withdraw from an ATM in Caracas. They’re worth around $0.05. Laya stated that she had waited 20 minutes in line to obtain $0.05 in hyperinflated currency worth little to no value,according to CCN.

Even though bitcoin transactions can take hours – even days – to settle, local merchants have readily embraced the digital currency. This is a revolution that has the potential to completely change the global financial system, but I have a feeling that global central banks will never let it get that far.

The current system funnels literally trillions of dollars to the very top of the food chain, and the elite are going to jealously guard their golden goose.

Michael Snyder

Michael T. Snyder is a graduate of the University of Florida law school and he worked as an attorney in the heart of Washington D.C. for a number of years. Today, Michael is best known for his work as the publisher of The Economic Collapse Blog. Michael and his wife, Meranda, believe that a great awakening is coming and are working hard to help bring renewal to America. Michael is also the author of the book The Beginning Of The End