Quantative Easing (QE) and its affect on the irish economy

everdead.ie

Hi Folks,

Just thought I'd raise this question again, mostly due to Blackrock being brought on board to flesh out a QE plan as well as Draghi making noises about actually implementing this as inflation plummets.


The talk is that this QE program is going to be targeting private Asset backed securities replacing them with cash in the European banks.

If Irish banks are injected with this cash I wonder which assets would be sold?

Could they sell of non performing assets or tracker mortgages and in turn both increase lending and reduce interest rates as they no longer need performing loans to cover non-performing loans?

sock puppet

A mortage or loan isn't a tradeable security. They'd have to be securitised first and sold onto the open matket, after which the ECB would buy at market value

Geuze

everdead.ie wrote: »

Hi Folks,

Just thought I'd raise this question again, mostly due to Blackrock being brought on board to flesh out a QE plan as well as Draghi making noises about actually implementing this as inflation plummets.


The talk is that this QE program is going to be targeting private Asset backed securities replacing them with cash in the European banks.

If Irish banks are injected with this cash I wonder which assets would be sold?

Could they sell of non performing assets or tracker mortgages and in turn both increase lending and reduce interest rates as they no longer need performing loans to cover non-performing loans?

QE means that the ECB would buy financial assets.

Typically, they would buy large amounts of bonds in the bond markets.

This might mean buying lots of Govt bonds, although that isn't 100% clear yet.

Presuming that comm banks would be the sellers, then the Govt bonds would leave the banks balance sheet, to be replaced with CB reserves.

The ECB would credit the comm bank's account at the ECB.

The ECB would not be buying mortgage loans on the books of the banks.

realitykeeper

everdead.ie wrote: »

If Irish banks are injected with this cash I wonder which assets would be sold?

Could they sell of non performing assets or tracker mortgages and in turn both increase lending and reduce interest rates as they no longer need performing loans to cover non-performing loans?

These are interesting questions. One thing that is known is that QE means creating more Euros. This will devalue existing Euros. The newly created Euros will be used to buy private asset backed securities which will cause the European stock markets to rise. However, while the European equity markets may rise, the Euro in which they are valued will be falling.

So, QE will risk causing an equity bubble which is not desirable and it will also cause a flight from euros to gold and currencies which are not subject to QE. In other words, it will result in a net loss to the Eurozone. It would no doubt work in increasing interest rates but the interest rates will be rising from internally generated economic activity in the Eurozone. Most of the economic activity will probably not be geared toward the export sector from the eurozone to the Brics, so it will do nothing to aid eurozone external competitiveness.

What will happen is goods from the Brics will cost more in Euros, so some of the inflation will be imported.

sock puppet

Geuze wrote: »

QE means that the ECB would buy financial assets.

Typically, they would buy large amounts of bonds in the bond markets.

This might mean buying lots of Govt bonds, although that isn't 100% clear yet.

Presuming that comm banks would be the sellers, then the Govt bonds would leave the banks balance sheet, to be replaced with CB reserves.

The ECB would credit the comm bank's account at the ECB.

The ECB would not be buying mortgage loans on the books of the banks.

The ECB would rather buy ABS too, the problem is that European financial markets aren't as developed as in the US, though the ECB are aiming to increase the size of the securitisation market.

Lantus

QE is a great example of money creation.

Gov decides it needs some cash and so asks the CB for say 10 billion. In return the CB agrees to 'buy' 10billion in bonds. These are just nice bits of paper with 10billion written on them. In return the CB prints up 10billion other bits of paper which become 'money'. In reality its all electronic so there is no printing of money (only about 3% of all money in existence is actually 'real')

POOF! 10 billion money is made. Of course what has really happened is that we have just created 10 billion of debt as this money will need to be paid back. Hence why this process is called monetary expansion rather than money creation. Next add in the killer app 'interest' which ensures that debt can never be paid off because interest requires more money back then has ever been created at any point in time.

The only way the system works is if we keep creating more and more debt through monetary expansion. What bankers call the fractional reserve banking. You couldn't make it up really.

andrew

Lantus wrote: »

QE is a great example of money creation.

Gov decides it needs some cash and so asks the CB for say 10 billion. In return the CB agrees to 'buy' 10billion in bonds. These are just nice bits of paper with 10billion written on them. In return the CB prints up 10billion other bits of paper which become 'money'. In reality its all electronic so there is no printing of money (only about 3% of all money in existence is actually 'real')

POOF! 10 billion money is made. Of course what has really happened is that we have just created 10 billion of debt as this money will need to be paid back. Hence why this process is called monetary expansion rather than money creation. Next add in the killer app 'interest' which ensures that debt can never be paid off because interest requires more money back then has ever been created at any point in time.

The only way the system works is if we keep creating more and more debt through monetary expansion. What bankers call the fractional reserve banking. You couldn't make it up really.

Quantitative Easing is explained on page 11 here. It does not, as you mention, involve the government deciding that it needs some cash.

realitykeeper

Lantus wrote: »

... this process is called monetary expansion rather than money creation ... add in the killer app 'interest' which ensures that debt can never be paid off because interest requires more money back then has ever been created at any point in time.

The only way the system works is if we keep creating more and more debt through monetary expansion. What bankers call the fractional reserve banking. You couldn't make it up really.

It is true that globally, all debt cannot be repaid. There is however a way for Irish debt to be paid off in theory, even though it would cost more than the central bank has borrowed. Ireland can do this by consistently earning more in international trade, by working harder and spending less than everyone else. In other words by competing.
Unfortunately, the Irish have consistently worked less and spent more than every other country which is why it is the most indebted nation on earth. Every cent of Ireland`s debt will eventually have to be repaid with interest. The next major international recession will be especially interesting where Ireland is concerned, Iceland by comparison is better prepared for the next downturn.

Godge

realitykeeper wrote: »

Iceland by comparison is better prepared for the next downturn.

If you mean by that that living standards in Iceland haven't recovered and are still bouncing along the bottom and therefore haven't anywhere to fall, then you are correct.

If you mean that the Icelandic economy is healthy, then you are wrong. They still cannot loosen capital controls for fear of a complete collapse.

andrew

realitykeeper wrote: »

Unfortunately, the Irish have consistently worked less

Hours worked and productivity.png

Nope; below average, but more productive than nearly anyone else.

spent more

consumption.png

Definitely not

the most indebted nation on earth.

debt.png

Not that either - and the countries with the highest debt aren't exactly basket cases.

carpejugulum

andrew wrote: »

Hours worked and productivity.png

Nope; below average, but more productive than nearly anyone else.



consumption.png

Definitely not



debt.png

Not that either - and the countries with the highest debt aren't exactly basket cases.

GDP is a misleading indicator for small export-oriented economies
That doesn't mean realitykeeper is not wrong.

realitykeeper

andrew wrote: »

Hours worked and productivity.png

Nope; below average, but more productive than nearly anyone else.
consumption.png

Definitely not
debt.png

Not that either - and the countries with the highest debt aren't exactly basket cases.

According to this documentary, Ireland has more debt than any other country: http://www.youtube.com/watch?v=AYVZKpH3pnM

The debt refers to the total debt per capita held by government, privately and by banks.

It is also true that the Irish worker may be highly productive if you look for example exclusively at the private sector. It is easy to give that impression because Ireland is a developed economy. Due to our tax regime, multinational companies spent a lot of money investing here and those investments have an value added effect to the workforce.

If you use an expensive machine then of course you will be more productive than someone in Asia who is doing the same work by hand for twice as many hours and 15% of the pay.

The work/spend ratio refers to all work, ie those working in the private sector, the public sector and not working at all. The spending, refers to all spending: by government, banks and individuals.

Even today, despite improved competitiveness, the Irish Government is borrowing to spend and the banks are borrowing to lend. Ireland needs an annual stress test to see how it would cope with a recession.

Getting back to QE, printing money to buy equities/bonds is dangerous. It could cause a run on equities, bonds or the currency itself. QE could eventually be the cause of a global recession.

In the event of a global recession, the EU and US will have to choose between a depression and a massive increase in QE. If this happens the ECB and the FED will eventually own everything. What happens then, - communism?

Geuze

Here is the public debt data, provided by Eurostat:

http://epp.eurostat.ec.europa.eu/cache/ITY_PUBLIC/2-22072014-AP/EN/2-22072014-AP-EN.PDF


http://epp.eurostat.ec.europa.eu/cache/ITY_PUBLIC/2-22012014-AP/EN/2-22012014-AP-EN.PDF

Our public debt to GDP is very high, but not the highest in the EU.

Geuze

Here is our Int'l Investment Position and External Debt, as published by CSO:

http://www.cso.ie/en/releasesandpublications/er/iiped/internationalinvestmentpositionandexternaldebtmarch2014/#.VAmCvvmwJcQ

Note that huge amounts of external debt is linked to the IFSC, and is not directly relevant to the Irish economy.

recedite

realitykeeper wrote: »

Even today, despite improved competitiveness, the Irish Government is borrowing to spend and the banks are borrowing to lend.

If Ireland was not repaying interest on govt. debt, would income cover expenditure?
Topical question, given Noonan's efforts during the week to juggle the various loans.

recedite

This is also an interesting question in relation to the possibility of Scotland going independent.
Could Scotland function as a debt free economy, while using the £, by staying in credit?
Deutsche Bank issued a dire warning to the Scots during the week, saying that they did not understand the consequences of using another country's currency; ie not being able to issue govt. debt.

Alex Salmond, however, has gone on the record saying that Scotland would take on a share of the UK national debt if he came to a satisfactory arrangement with the Bank of England to share sterling. So the clear implication there is that if they won't be allowed to issue any new debt/money, then they won't take responsibility for any existing UK debt.

It would be interesting to see if they could run an economy by always keeping a surplus to hand, in which case they could continue to use sterling banknotes purely as a medium of exchange, even without the ability to control the currency, or issue new money.

coolshannagh28

Interesting also that the debate has been shifted to focus on the Scottish stereotype of misery in matters of money , offensive on one level but seems to be having an influence on a debate that should come down to so much more.

recedite

In banking, perception is everything.
People in England perceive the Scots to be most austere and thrifty (ie the most miserly ) people in the UK. They are also perceived to be generally straight talking and honest. The Scots have used this to their advantage in the past resulting in a larger banking and pension fund industry than their own population would justify.
This is possibly connected with the Presbyterian religion. We used to have an equivalent in Ireland in regard to Quakers and the grain milling industry. Farmers trusted that if they left a cartload of grain in to a Quaker owned mill, it would be weighed correctly if it was being purchased, or if it was just to be milled the full amount of flour or oats produced would be recorded to their account.

realitykeeper

recedite wrote: »

Deutsche Bank issued a dire warning to the Scots during the week, saying that they did not understand the consequences of using another country's currency; ie not being able to issue govt. debt.

Zimbabwe no longer use their own currency because of hyperinflation caused by the Bolshevik policies of Mugabe. Instead it uses several mainstream currencies including dollars and yuan. Not an analogy I know but interesting nonetheless. As for not being able to issue government debt, that would be wonderful. Ireland is paying billions in interest every year because of government debt. If the government could not borrow it would be forced to be fiscally responsible. It would have to grow the economy organically.

Godge

realitykeeper wrote: »

Zimbabwe no longer use their own currency because of hyperinflation caused by the Bolshevik policies of Mugabe. Instead it uses several mainstream currencies including dollars and yuan. Not an analogy I know but interesting nonetheless. As for not being able to issue government debt, that would be wonderful. Ireland is paying billions in interest every year because of government debt. If the government could not borrow it would be forced to be fiscally responsible. It would have to grow the economy organically.

yes, that is a great idea, let us copy Zimbabwe.

recedite

realitykeeper wrote: »

As for not being able to issue government debt, that would be wonderful.

I can see the benefits of being able to issue short term govt. debt, just to stimulate an economy during a lean period, but unfortunately politicians can't be trusted to pay it all back soon afterwards.
A govt. that could not issue its own money could still arrange a bilateral loan with another country, or it could sell bonds in a foreign currency. The foreign lenders and the bond buyers could be trusted not to get involved in any unsustainable long term debt. So they would be inherently better than local politicians at restricting the accumulation of large amounts of debt.

If an independent Scotland were to start off on this basis, and also be free of all existing UK debt, it might do very well. Especially given that it is a net exporter of energy; both in oil and renewable wind power.

recedite

Godge wrote: »

yes, that is a great idea, let us copy Zimbabwe.

You are missing the point. Zim got that way because they kept on issuing money. QE without restraint in other words.
Now that they are using foreign currency, the hyperinflation is brought back under control.

andrew

recedite wrote: »

I can see the benefits of being able to issue short term govt. debt, just to stimulate an economy during a lean period, but unfortunately politicians can't be trusted to pay it all back soon afterwards

For a bunch of reasons, short term debt isn't necessarily more 'sustainable' than long term. The opposite is usually true. What determines debt sustainability is the interest rate you have to pay on it. Think of short term payday loans versus mortgages, for example; which of those is more 'sustainable'?

realitykeeper

andrew wrote: »

What determines debt sustainability is the interest rate you have to pay on it. Think of short term payday loans versus mortgages, for example; which of those is more 'sustainable'?

Short term debt is far smaller than long term debt. Long term debt at low interest may be sustainable as long as the country can be run with little or no deficit (which is where the government is trying to get to over the next year or so). The problem is that any shock to the system destroys the country`s ability to pay, just like a mortgage holder losing their job. Shocks happen over the long term therefore the large amount of debt the country has will ultimately be unsustainable.

recedite

andrew wrote: »

What determines debt sustainability is the interest rate you have to pay on it..

And the returns you are getting from the use of the money. If you have invested the money wisely and have pulled your economy out of recession, then it may be worth paying high interest rates temporarily.

If you are constantly borrowing for "nothing in particular" over a long period of time, then there is something wrong. This is something Ireland has been guilty of. Even seemingly wealthy countries such as UK and USA have done it. Even if the debt seems sustainable during the boom times, the interest payments are still a constant drain on prosperity. When some crisis hits, the debt becomes unsustainable, even at reduced interest rates.

andrew

realitykeeper wrote: »

Short term debt is far smaller than long term debt. Long term debt at low interest may be sustainable as long as the country can be run with little or no deficit (which is where the government is trying to get to over the next year or so). The problem is that any shock to the system destroys the country`s ability to pay, just like a mortgage holder losing their job. Shocks happen over the long term therefore the large amount of debt the country has will ultimately be unsustainable.

Shocks happen over the long term, but they don't last for the long term. They tend to be sort term in and of themselves. If you have long term debt with a manageable repayment schedule, then a short term shock does not, as you say, destroy the country's ability to repay. See for example pretty much every single country with government debt. This is because in the long run, growth will be high enough that the economy grows more than the debt burden. In contrast, short term debt may not be repayable if it must be repaid at the same time a shock occcurs.

If you have long term debt you repay over the long term, and in the long term most economies grow. If you have short term debt, you repay in the short term, and most economies will suffer a short term shock at some point. As such, short term debt isn't particularly sustainable.

recedite

Defining short term debt as that which can be repaid soon after the economy picks up; it can be sustainable in the sense that it can be repaid.

Defining long term debt as that which is used to generate economic growth, and which also relies on inflation and economic growth to make tolerable, which in turn lessens the burden of it, without repaying it. In other words, a circular inflationary trap, such as the US national debt, which can never be escaped from.

andrew

recedite wrote: »

Defining short term debt as that which can be repaid soon after the economy picks up; it can be sustainable in the sense that it can be repaid.

That's not what sustainable is. Sustainable is something you can do indefinitely. Most countries have always have some sort of debt burden, which is perfectly sustainable (indefinitely) so long as they can make interest repayments, which again most countries can. Countries do not need to ever be debt free.

Godge

andrew wrote: »

That's not what sustainable is. Sustainable is something you can do indefinitely. Most countries have always have some sort of debt burden, which is perfectly sustainable (indefinitely) so long as they can make interest repayments, which again most countries can. Countries do not need to ever be debt free.

Exactly, and most people do not understand this.

recedite

andrew wrote: »

Countries do not need to ever be debt free.

Back in the 1850's, absentee landlords believed the same of their tenants. A rent was set at the correct rate if it was "bearable" for the tenant. If the tenants died, the rent was proved to be unsustainable.

The landlords collected interest on land that they claimed ownership of, just as modern banks collect interest on money that they claim ownership of.

I am looking at this from the point of view of the citizen, in which case the word "sustainable" takes on a more nuanced meaning than being merely defined as "bearable".
The objective is not merely to survive, but to prosper.

Godge

recedite wrote: »

Back in the 1850's, absentee landlords believed the same of their tenants. A rent was set at the correct rate if it was "bearable" for the tenant. If the tenants died, the rent was proved to be unsustainable.

The landlords collected interest on land that they claimed ownership of, just as modern banks collect interest on money that they claim ownership of.

I am looking at this from the point of view of the citizen, in which case the word "sustainable" takes on a more nuanced meaning than being merely defined as "bearable".
The objective is not merely to survive, but to prosper.

Tenants are not countries.

andrew

recedite wrote: »

I am looking at this from the point of view of the citizen, in which case the word "sustainable" takes on a more nuanced meaning than being merely defined as "bearable".
The objective is not merely to survive, but to prosper.

No, it takes on a completely different meaning to the actual meaning of the word sustainable. If your point is that high levels of government debt are associated with lower average economic growth, then as Reinhart and Rogoff ended up showing, that's also not the case.

recedite

andrew wrote: »

No, it takes on a completely different meaning to the actual meaning of the word sustainable. If your point is that high levels of government debt are associated with lower average economic growth...

That's not my point at all. During the celtic tiger era, this country took on high levels of private debt, which was subsequently converted to public debt. The borrowings induced high levels of apparent growth, but how sustainable was that?

My point is that a steady state economy can deliver prosperity without high levels of growth. High levels of growth are only needed when an economy is trying to fund interest payments to the absentee banks and bondholders. That becomes a self perpetuating cycle of inflation.

Godge

recedite wrote: »

That's not my point at all. During the celtic tiger era, this country took on high levels of private debt, which was subsequently converted to public debt. The borrowings induced high levels of apparent growth, but how sustainable was that?

My point is that a steady state economy can deliver prosperity without high levels of growth. High levels of growth are only needed when an economy is trying to fund interest payments to the absentee banks and bondholders. That becomes a self perpetuating cycle of inflation.

Economic growth is needed to maintain standards of living when the population is growing. If you want to raise the standards of living, you need to increase growth further.

recedite

That is a truism, and at some point the population stops expanding. Even then prosperity can still keep increasing, due to (very modest) increases in productivity. That is provided those modest productivity increases are not offset by the costs of servicing debt/paying interest. Hence the issue of sustainability.

realitykeeper

andrew wrote: »

Shocks happen over the long term, but they don't last for the long term. They tend to be sort term in and of themselves. If you have long term debt with a manageable repayment schedule, then a short term shock does not, as you say, destroy the country's ability to repay. See for example pretty much every single country with government debt. This is because in the long run, growth will be high enough that the economy grows more than the debt burden. In contrast, short term debt may not be repayable if it must be repaid at the same time a shock occcurs.

If you have long term debt you repay over the long term, and in the long term most economies grow. If you have short term debt, you repay in the short term, and most economies will suffer a short term shock at some point. As such, short term debt isn't particularly sustainable.

The problem with the notion that long term debt can be deferred to long term resolution is that sometimes you get your wish. Take Scotland for example, they are ruled by England because of debt to the point where they have become institutionalized. Eygpt incurred debt to the UK back in the nineteenth century and became a quasi colony of the realm. The legacy of that debt has repercussions to this day.

Where default happens across many countries then the effects are harder to deal with. Trying to solve debt by incurring more debt may solve the problem in the medium term but it is only going to making the inevitable more difficult to resolve in the longer term.

realitykeeper

Godge wrote: »

Economic growth is needed to maintain standards of living when the population is growing. If you want to raise the standards of living, you need to increase growth further.

Borrowing to fund living standards is not very wise, even if the stated intention is to use the borrowings to invest, in infrastructure for example. If Ireland had not borrowed money over the last few years, would it have been possible to maintain dole payments and public sector pay at present levels? Hardly. So Ireland borrowed to fund a lifestyle it did not earn.

The present "growth" effect in the economy is akin to a junkie`s high. The recipients of the borrowed money, i.e. civil servants, public sector people and those on welfare are spending the money in the economy and that gives the illusion of growth. Often the money is spent on imported products so there is massive hemorrhaging of the borrowed money back out of the economy. Meanwhile the interest payments need to be paid and will need to be paid even when the global economy recedes.

noodler

We are getting very existential in here.

The State will be running a primary balance this year (next year at worst) so at that point our only borrowing will be to fund interest payments and debt roll overs - no longer public services.

Of course, the problem is (and as has been pointed out by the Fiscal Council last week) is that we need to run such a primary balance for the guts fo a decade to make the necessary dent on our Debt-GDP ratio. I am not sure I trust the political cycle in Ireland to maintain this level of discipline once people percieve/see that there are increased resources.

recedite

noodler wrote: »

The State will be running a primary balance this year (next year at worst) so at that point our only borrowing will be to fund interest payments and debt roll overs - no longer public services.

Well then we will be like the modern equivalent of the ragged 19th Century tenant farmer. He can feed his family, just about, but any surplus goes to others. He always owes rent, no matter what he does.

noodler

recedite wrote: »

Well then we will be like the modern equivalent of the ragged 19th Century tenant farmer. He can feed his family, just about, but any surplus goes to others. He always owes rent, no matter what he does.

Well, no.

Revenues will rise as well, expenditure will rise as well.

Just that the difference between these (excluding debt repayments) will have to stay neutral (or more likely positive) in order for us to get our debt ratio down to 60% or 80%.

Economic growth and inflation will do some of the heavy lifting for us - it won't require us to keep cutting but it will require us to only increase expenditure in line with growth.

recedite

Inflation is not our friend. It devalues the money in peoples pockets.
It is caused by paying out the interest payments.
If I lend you a cake, and when I get it back, I eat 5%, then the cake is devalued. Then I lend it out again to someone else as a full cake. That's the relationship between interest payments and inflation.

noodler

recedite wrote: »

Inflation is not our friend. It devalues the money in peoples pockets.
It is caused by paying out the interest payments.
If I lend you a cake, and when I get it back, I eat 5%, then the cake is devalued. Then I lend it out again to someone else as a full cake. That's the relationship between interest payments and inflation.

...

Okay but inflation is and will always be an ever present.

A reasonable rate of inflation is usually a positive indicator for an economy.

I don't mean to say that I pray for hyperinflation or anything - just stating that reducing our debt-GDP ratio won't require nominal payments alone.

AlmightyCushion

noodler wrote: »

Well, no.

Revenues will rise as well, expenditure will rise as well.

Just that the difference between these (excluding debt repayments) will have to stay neutral (or more likely positive) in order for us to get our debt ratio down to 60% or 80%.

Economic growth and inflation will do some of the heavy lifting for us - it won't require us to keep cutting but it will require us to only increase expenditure in line with growth.

Maybe I'm missing something but how does our debt to GDP ratio decrease when running a primary balance? We're still having to borrow to pay the interest on the debt so this will increase the national debt. If growth rates are higher than the interest rate owed on the debt then it should probably decrease a bit but I imagine the figures are pretty negligible. Plus, if you go through a period of low growth, high interest rates or , even worse, both, you're back where you started with your debt to GDP ratio increasing. Having a neutral budget or a small surplus would be much safer and a better bet in the medium to long term.

noodler

AlmightyCushion wrote: »

Maybe I'm missing something but how does our debt to GDP ratio decrease when running a primary balance? We're still having to borrow to pay the interest on the debt so this will increase the national debt. If growth rates are higher than the interest rate owed on the debt then it should probably decrease a bit but I imagine the figures are pretty negligible. Plus, if you go through a period of low growth, high interest rates or , even worse, both, you're back where you started with your debt to GDP ratio increasing. Having a neutral budget or a small surplus would be much safer and a better bet in the medium to long term.

http://www.economist.com/blogs/dailychart/2011/11/debt-dynamics-0

Can't fault anything you have said Almighty - thee is an equation for it.

There are two elements to it.

Our interests rates are fixed though (on our outstanding debt) and we do not need to borrow much more if we maintain fiscal discipline.

9bn a year for interest is reasonably manageable for us and this will fall if we can maintain the surplus.

tl:dr I'd be focusing on the Primary Balance part because it is the part we can control. Using the surplus to pay off some debt lower the debt ratio and reduce the amount of interest we need to borrow to pay next time. For what you are suggesting (i.e. the borrowings increasing the Debt-GDP ratio - it would need to be having a greater impact on our debt then the surplus and nominal growth).

Godge

AlmightyCushion wrote: »

Maybe I'm missing something but how does our debt to GDP ratio decrease when running a primary balance? We're still having to borrow to pay the interest on the debt so this will increase the national debt. If growth rates are higher than the interest rate owed on the debt then it should probably decrease a bit but I imagine the figures are pretty negligible. Plus, if you go through a period of low growth, high interest rates or , even worse, both, you're back where you started with your debt to GDP ratio increasing. Having a neutral budget or a small surplus would be much safer and a better bet in the medium to long term.

This year our debt to GDP ratio will go down.

Once you get your growth plus inflation above your budget deficit, the ratio declines.

So we will have growth around 5% and inflation of around 1% which will make an impact if we keep our budget deficit close to 3.5-4%. The end-September Exchequer figures will be particularly interesting.

Scofflaw

Godge wrote: »

Exactly, and most people do not understand this.

Most people find it hard to get their head around the concept of "immortal and perpetually growing", and the implications of that.

cordially,
Scofflaw

realitykeeper

Scofflaw wrote: »

Most people find it hard to get their head around the concept of "immortal and perpetually growing", and the implications of that.

cordially,
Scofflaw

An economy can also languish in the doldrums for hundreds of years. China is one such example. Happily, that dark age has now ended for China. Europe and the US are positioning themselves for a similar prolonged dark age because of poor decisions by leftist governments.

Scofflaw

realitykeeper wrote: »

An economy can also languish in the doldrums for hundreds of years. China is one such example. Happily, that dark age has now ended for China. Europe and the US are positioning themselves for a similar prolonged dark age because of poor decisions by leftist governments.

The extent to which ancient China, or any ancient economy, is comparable to a modern economy is not, I think, very large.

cordially,
Scofflaw

realitykeeper

Scofflaw wrote: »

The extent to which ancient China, or any ancient economy, is comparable to a modern economy is not, I think, very large.

cordially,
Scofflaw

... but on a fundamental level the comparison is identical. Quantitative easing involves spending on a massive scale. Immediately prior to Europe`s golden age of exploration, China had embarked on its own mini age of exploration.

Unlike Europe, China overextended itself financially by building ships which were gigantic by the standards of the time. After a few years, China became introspective and went into centuries of decline.

andrew

realitykeeper wrote: »

... but on a fundamental level the comparison is identical. Quantitative easing involves spending on a massive scale. Immediately prior to Europe`s golden age of exploration, China had embarked on its own mini age of exploration.

Unlike Europe, China overextended itself financially by building ships which were gigantic by the standards of the time. After a few years, China became introspective and went into centuries of decline.

I think you may be over-simplifying things just a tad.

Godge

realitykeeper wrote: »

... but on a fundamental level the comparison is identical. Quantitative easing involves spending on a massive scale. Immediately prior to Europe`s golden age of exploration, China had embarked on its own mini age of exploration.

Unlike Europe, China overextended itself financially by building ships which were gigantic by the standards of the time. After a few years, China became introspective and went into centuries of decline.

Cause and effect?

Gigantic ships lead inexorably to economic decline. Yes, reality speaks.