One of the benefits of studying everything written in the other Blogs is that you get to know what principles to follow in dealing with a crisis.
Principles such as not unbalancing spending patterns or changing work patterns, and finding the means to protect wealth and to keep a hold on the kind of wealth distribution that has become established.
Principles like building confidence in your recovery plan by making everyone feel more secure with their borrowings and their wealth.
To achieve some of these things, new economic structures are needed, but if all of the above are achieved then recovery ought to be assured - as it will be eventually, but this way it should start right away.
Here are the thoughts I put together based upon the above right from the start of the Greek Crisis.
Finally - 24th December 2011 The IMF admits I was right all along...
"Spending cuts can make it even harder for governments to borrow money"
http://www.businessinsider.com/spending-cuts-makes-government-debts-riskier-2011-12?nr_email_referer=1&utm_source=Triggermail&utm_medium=email&utm_term=Money%20Game%20Chart%20Of%20The%20Day&utm_campaign=Moneygame_COTD_122111
Today 10th May 2012 we learn that only 35.9% of the Greek population is employed. My recommendation all along has been to raise that number as fast as possible if the crisis is to be contained. How? Remove early retirement and stimulate the economy. How? Read what I wrote in the first place - see below.
How many times have I been right and ignored? Plenty. Click HERE
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MANAGING SOVEREIGN DEBT CRISES
Finally - 24th December 2011 The IMF admits I was right all along...
"Spending cuts can make it even harder for governments to borrow money"
http://www.businessinsider.com/spending-cuts-makes-government-debts-riskier-2011-12?nr_email_referer=1&utm_source=Triggermail&utm_medium=email&utm_term=Money%20Game%20Chart%20Of%20The%20Day&utm_campaign=Moneygame_COTD_122111
Today 10th May 2012 we learn that only 35.9% of the Greek population is employed. My recommendation all along has been to raise that number as fast as possible if the crisis is to be contained. How? Remove early retirement and stimulate the economy. How? Read what I wrote in the first place - see below.
How many times have I been right and ignored? Plenty. Click HERE
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MANAGING SOVEREIGN DEBT CRISES
I have added a page on Quantitative Easing HERE. This covers some of the same ground.
Basically, there are three things that need to be done with countries like Greece, Span, and Italy, and even the UK and the USA:
1. Convert their sovereign debt to debt that is index-linked to the GDP or Average rate of Earnings Growth (AEG% p.a.) in their economy.
Agree to freeze interest payments or to minimize them until after the recovery. This freezes the total liability in terms of the GDP multiple of the nation, and secures the creditors.
2. Make a plan to slow additional growth in the debt until it stops growing as a result of additional employment and output and net tax revenues from that,
3. Implement the plan even if it needs some tax stimulus and additional borrowing, but in the case of Greece in particular, get more people working and fewer retiring on unaffordable pensions.
The sister site Macro-economic Design introduces exciting new concepts based around the preservation of wealth and budgets and explains the practicalities and benefits.
Here is what I wrote originally...in edition 7 - now edited a bit but not much
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The longer book has got delayed - too much content, but...
Here it is IN A NUTSHELL
- Any solution to a Sovereign Debt Crisis that does NOT involve cutting taxes to stimulate growth is probably not a solution.
- To pay for a tax break we need a source from which to either reduce costs or to borrow money, or both.
- Costs can most easily be reduced in a balanced way by extending the retirement age. This is unpopular but the alternative may be even less popular - having too much taxation and low economic growth, a smashed up economy (maybe in some cases) and / or a retired population that lives in poverty as dependents on the impoverished working population.
- I suggest that at a later date when the crisis is over, and to make the change more acceptable, national pensions should be phased in gradually so that people can start to ease up on their work from age 55 onwards. There is a study which shows that people who work long hard hours beyond the age of 55 lose two years of their life for every year that they do that. Thus by age 65 their life expectancy may be down to two or three years. It happens. Boeing was a quoted example.
- So start with a very low payment at age 55 and raise it every year to age 75 or 80. If these people continue to work but in a less stressful way, with more flexible hours or shorter hours, they will be happier, more dignified, and they will live longer. The taxes that they pay and the contribution they make to the economy will be significant.
- My father worked as a doctor and a businessman through to age 83 when he was struck down in a car accident by a reckless young driver. I am working happily (only when I want to) at age 72 and the work keeps me fit and well. I work more effectively that way.
- But the revamping of the retirement plan cannot be done all at once, and the cost saving of extending the current full pension retirement age right away will not be coming in immediately. So some form of funding is needed to bridge the gap.
- Quite possibly there will be a need for other cut-backs or other borrowing.
- The problem with cutbacks is that it reduces tax revenues and GDP.
- The problem with borrowing is not as great as long as a break even point can be seen - a time when it will end and as long as the borrowing is affordable. How can that be?
- The lender will want to ensure that there is a return on the investment. If it is a bond that is index-linked to NGDP (nominal GDP) and real economic growth gets moving then there will be an investment return equal to the real rate of economic growth plus interest if any is added.
- In a sense this will be cost free to the borrowing government. How so?
- If 1GDP of Sovereign Debt is out there and index-linked to NGDP (nominal GDP) then after a decade or more has passed the debt will be 1GDP. No increase. Cost free. Well unless a small interest coupon is paid. Say 1%.
- Doing this will buy time so that economic growth can balance the books eventually, and because it costs virtually nothing, everyone can have confidence in this plan.
- Who will provide the loans?
- This may be local pension funds that are restructured to accommodate this formula, it may be private citizens if there is tax relief on the indexation, it may be other Sovereign States, the IMF, or the European Central or other Central Bank. Any combination that adds up to a rescue.
- The sensible limit for Sovereign debt would be the amount of such assets needed by the local economy leaving space for other forms of borrowing, such as business finance and Housing Finance, both of which can be structured to have similar features as safe investment assets with safer budgets that are not dynamically unstable as is explained at http://macro-economic-design.blogspot.com.
- What if the pension funds want a higher income than just a 1% coupon? Then offer them a repayment bond comprising capital plus interest but fund the capital repayments with new bonds.
- What if there is not enough money left for the rest of the economy to borrow, or the rest of the world does not have enough money to lend? Well there is only one solution - print some more. What if the central banks print money to accommodate this shortfall, if any?
- This will ultimately cause inflation and it may go on for a very long time as far as I can see. Therefore financial assets will all have to have some form of linkage to NGDP or to Average Earnings/incomes Growth (AEG% p.a.) so as to protect their wealth. This is the only way to keep an economy balanced during a period of inflation. See IN A NUTSHELL.
- In fact if we structure all debts (debts are always someone's assets) in this way with a linkage of this kind, this will be an excellent thing. Having the value of your pension fund and long term savings protected by a link to NGDP (effectively to average incomes growth) will calm a large part of the population, making it more difficult to panic them into a downwards spiral into recession. And it will cost very little. Your pension will benefit from real economic growth and without risk - provided the world starts behaving sensibly like this.
- Having Sovereign Debt that is manageable and affordable in this way will raise the credit rating of the government and make it cheaper for them to borrow.
- But this on its own will not keep an economy in balance during a period of subsequent inflation, or during a period of rising interest rates when economies recover. To achieve that we must also restructure Housing Finance and Business Finance.
- What Edward Ingram is personally going to do about this in 2012 can be found on the page PASSION TO PROTECT.
- There, Edward announces his intention to launch the world's first SAFE mortgages and he shows beyond question that the present lending system used for housing finance is unsafe for everyone including the economy. His alternative system to be launched in 2012 if possible is not risky either for the lender or the borrower or the economy. Everyone is protected.
- And it offers that same link to incomes growth (AEG) that our retirement funds need for protection. As it protects the borrower it also protects the retirement funds of others, taking both parties out of the financial maelstrom for the duration of the contract. Not longer.
- Does all this interfere with central bank policy and money supply control? No it makes that easier for them. This lending system does respond to monetary tightening by lending less, but not a whole lot less. And it can lend more when monetary policy eases, but not a whole lot more. But only if the lending industry is properly regulated will it not lend too much - any business has to compete with others and if others over-lend - this system may have to. But the good news is this: it is so powerful it could have rescued many of the American Banks in 2008. All this is discussed on that PASSION TO PROTECT page.
- If bubbles and crashes and jumping around mortage payments are eliminated in this way, we may not need BASEL III reserve levels. A central banker once told Edward that in that case we do not need BASEL II reserve levels.
- With this new ILS System (Ingram's Lending and Savings System), very few reserves should be needed. What risks there are should be very small.
- If we continue with the present financial systems people will continue to get thrown out of their houses, their pensions and savings will be under constant threat, and at any time the whole economy can spiral down into a recession as a result of lost wealth and lost budgetary control and lost confidence. Just like last time / this time. Everything gets out of balance and is almost unable to recover later.
SUMMARY
The whole economy will run with a greater feeling of confidence. Inflation will not be a great big worry and neither will the Sovereign Debt. In fact a large pool of such sovereign debt will provide an excellent source of safe retirement funds, boosting people's confidence and reducing the tendency for an economy to spiral down when things are going badly elsewhere.
In the event that there is a lot of inflation, the trick is to allow excess money supply to be mopped up without hurting borrowers or investors or wealth or budgets. That is what the new debt structures can achieve: everything including prices and rentals and values and budgets responds as Adam Smith (Wealth of Nations) said it should do. My new designs just take the obstacles out of the way.
So the way forward is forwards, not backwards into recession.
The problems of Greece are just 2% of the European budget taken as a whole. They can solve it.
The problem in the USA is the TEA PARTY. They are right to say borrowing has its limits, but they are not right to cut jobs and employment to solve the problem. A new way is needed to prevent excess borrowing in the future. Not now. And a growing economy is needed to repay the excess debt when it can be afforded.
OTHER ISSUES - MORE DETAIL
There is a danger that the world will follow Japan into a long period of under-performance.
I have added a note on my other blog explaining how the present housing finance system generates feedback which tends to promote low levels of economic growth.
When lenders lend too much, then as soon as their economy begins to recover, their lenders raise repayment costs too fast.
You can lower interest rates as much as you have to, but you cannot just lower mortgage payments and lend as much as you like. If you do that then when interest rates rise there is a crisis. And when the Japanese economy does recover, interest rates will have to rise. Payments rise by around 12% for every 1% raise in interest rates going back to the mid-cycle rate.
What is the mid-cycle rate? For the USA and the UK and Japan if real economic growth is 3%, inflation is 1% then the mid-cycle rate in a growing confident economy has in the past been around 7% for housing Finance.
FURTHER READING:
http://macro-economic-design.blogspot.com
The LATEST UPDATES for ALL pages can be found HERE.
The problems of Greece are just 2% of the European budget taken as a whole. They can solve it.
The problem in the USA is the TEA PARTY. They are right to say borrowing has its limits, but they are not right to cut jobs and employment to solve the problem. A new way is needed to prevent excess borrowing in the future. Not now. And a growing economy is needed to repay the excess debt when it can be afforded.
OTHER ISSUES - MORE DETAIL
There is a danger that the world will follow Japan into a long period of under-performance.
I have added a note on my other blog explaining how the present housing finance system generates feedback which tends to promote low levels of economic growth.
When lenders lend too much, then as soon as their economy begins to recover, their lenders raise repayment costs too fast.
You can lower interest rates as much as you have to, but you cannot just lower mortgage payments and lend as much as you like. If you do that then when interest rates rise there is a crisis. And when the Japanese economy does recover, interest rates will have to rise. Payments rise by around 12% for every 1% raise in interest rates going back to the mid-cycle rate.
What is the mid-cycle rate? For the USA and the UK and Japan if real economic growth is 3%, inflation is 1% then the mid-cycle rate in a growing confident economy has in the past been around 7% for housing Finance.
FURTHER READING:
http://macro-economic-design.blogspot.com
The LATEST UPDATES for ALL pages can be found HERE.
