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Thegreat repression
Post-wargovernments reduced debt by constraining savers’ options. That is harder today.
OF THE manyunpleasant legacies left by the economic crisis the mountain of sovereign debtmay prove hardest to erode. Across the rich world, debt levels approaching 90%of GDP are now common. Indebted governments face an unenviable menu of options.Growing their way out of trouble will prove difficult as economies deleverage. Austerity, a second andunappetising choice, can easily choke recovery. Defaults are seen as a lastresort. Politicians are searching for an easier way.
There is another model. Following thesecond world war many countries reduced debt quickly without messy defaults orpainful austerity. British debt declined from 216% of GDP in 1945 to 138% tenyears later, for example. In the five years to 2016, by contrast, British debtas a proportion of GDP is expected to drop by just three percentage pointsdespite a harsh austerity programme. Why was it so much easier to cut debt inthe immediate aftermath of the war?
Inflation helped. Between 1945 and1980 negative real interest rates ate away at government debt. Savers depositedmoney in banks which lent to governments at interest rates below the level ofinflation. The government then repaid savers with money that bought less thanthe amount originally lent. Savers took a real, inflation-adjusted loss, whichcorresponded to an improvement in the government’s balance-sheet. The mystery is why savers accepted crummy returns over long periods.
The key ingredient in the mix, according to a recent working paper written by CarmenRinhaert of the Peterson Institute for International Economics and BelenSbrancia of the University of Maryland, was “financial repression”. The term was first coined in the 1970s to disparage growth-inhibiting policies in emerging markets but thetwo economists apply it to rules that were common across the post-war richworld and that created captive domestic markets for government debt.
The exchange-rate and capital controls ofthe Bretton Woods financial system kept savers from seeking high returnsabroad. High reserve requirements forced banks to lock up much of the economy’ssavings in safe asset classes like government debt. Caps on banks’ lendingrates ensured that trapped savings were lent to the sovereign at below-marketrates. Such rules were not necessarily adopted to facilitate debt reduction,though that side-effect surely didn’t go unnoticed the system was ubiquitous, reducing pressure on governments to abandon it.
Repression delivered impressive returns. Inthe average “liquidation year” in which real rates were negative, Britain and America reduced their debt bybetween 3% and 4% of GDP. Other countries, like Italyand Australia,enjoyed annual liquidation ratesabove 5%. The effect over a decade was large. From 1945 to 1955, the authorsestimate that repression reduced America’s debt load by 50percentage points, from 116% to 66% of GDP. Negative real interest rates wereworth tax revenues equivalent to 6.3% of GDP per year. That would be enough tomove America’sbudget to surplus by 2013 without any new austerity programme.
The same conditions of instability thatproduced the post-war system of repression are again at work. Banks’ reserverequirements are rising in the wake of the financial crisis. Regulators like Britain’sFinancial Services Authority are mandating that banks boost their holdings ofsafer government bonds for liquidity reasons. The new Basel 3 rules on bank capital still privilege government debt overother assets, nudging holdingstoward sovereign debt despite the possibility of below-market returns. Interestrates hint at a return to post-war conditions, too, according to theReinhart-Sbrancia sample of advanced economies. From 1981 to 2007 real interestrates were almost always positive. Since then they have been negative abouthalf of the time.
Don’t hold it in
Nor is repression alone enough to solve debtwoes. Inflation isnecessary too, and the example of Japan suggests that ageingsocieties may prefer to sacrifice the young to a long period of slow growthrather than erode the savings of older voters. Most importantly, governmentsmust stop adding new debt. Even in a financially repressed system austerity isnot entirely avoidable. Most economies must still cut their debts the hard way.
本来40的帖子是应该我发的，但我未及时看到版主的短信息，所以41的帖子今天补上，大家见谅啦！最近各国债务危机挺严重了，就找了一篇有关债务危机的文章!
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