Friday 13 January 2017

Borrowing from Peter to pay Paul

We can’t go on borrowing indefinitely, according to the Labour-Tory austerity mantra, and we need to reduce the national debt.  One of the ways in which that is to be achieved is by getting private companies, or other countries, to fund infrastructure projects, because, of course, they have the money sitting in their piggy banks and don’t need to depend on borrowing.  Or do they?
I’m far from being a fan of the Wylfa Newydd project in any event, but I noticed recently that there’s something curious about the way in which it’s being funded, when compared with the mantra referred to above.  According to press reports, up to £12 billion of the construction cost will be funded by the Japanese government.  So where, exactly, will the Japanese government find such a sum of money?
According to this list, the country with the largest public debt as a percentage of GDP is … Japan.  (The link shows several different ways of assessing the level of debt – I’ve used the column showing the average of CIA and IMF data.  Using one of the measures, the first and second positions of Japan and Greece are reversed, but the basic point still holds.)  So a country which has a debt ratio of 90% of GDP (the UK) cannot afford to borrow more to fund its infrastructure development, but it will instead rely on another country whose ratio is 174% (Japan) to fund that development.  By borrowing the money, of course.
Borrowing is fine, apparently, as long as someone else is doing it.  It only brings about the end of civilisation as we know it when the UK borrows money.  And that brings me back to a common theme on this blog – the decision as to whether a government should borrow or not owes more to ideology than to economics.

1 comment:

Democritus said...

When governments or individual citizens are borrowing in sterling, Yen or any other 'hard' fiat currency under the direct control of the state it is always possible for the government to inflate the debts away by boosting the money supply, hence the 'sovereigns don't go bust' perspective. The trouble seems to come where one is borrowing in a currency one can't control the value of - the $ in many cases (Argentina, Mexico, all the HIPCs whose debts were cancelled at Gleneagles), the euro in Greece's. In such cases sovereigns are far more like other customers and external shocks like a soaring dollar can play havoc with keeping on top of repayments - with the complication that recovering unpaid debt from a recalcitrant sovereign is next to impossible.

Following Brexit and November's election it seems to me we may be in line for a long overdue unified effort by the G7 at a proper reflationary stimulus. If Trump can deliver his infrastructure and tax cut plans (if they deserve the be dignified with that term) but doesn't stoke an immediate trade (or kinetic) war then there may be a chance that 2017 sees the rich world snap out of the secular stagnation trap into which misguided austerity has cast us since the immediate post crash 2008/10 Brown/Obama stimulus effort faded and was not followed up.

None of this means we can all live on credit alone forever obviously. There are strong incentives to be prudent when messing with the money supply and confidence in the currency and the fundamentals of borrowers is vital. The bond traders who treated IOUs from Athens as though they were as good as sovereign paper from Berlin will serve as an example to others until the next big crunch & defaults roll along