THE LIQUIDATION OF GOVERNMENT DEBT (.pdf format)

imf.org ^ | March 2011 | Carmen M. Reinhart & M. Belen Sbrancia

[Razzz42]

ABSTRACT

Historically, periods of high indebtedness have been associated with a rising incidence of default or restructuring of public and private debts. A subtle type of debt restructuring takes the form of “financial repression.” Financial repression includes directed lending to government by captive domestic audiences (such as pension funds), explicit or implicit caps on interest rates, regulation of cross-border capital movements, and (generally) a tighter connection between government and banks. In the heavily regulated financial markets of the Bretton Woods system, several restrictions facilitated a sharp and rapid reduction in public debt/GDP ratios from the late 1940s to the 1970s. Low nominal interest rates help reduce debt servicing costs while a high incidence of negative real interest rates liquidates or erodes the real of government debt. Thus, financial repression is most successful in liquidating debts when accompanied by a steady dose of inflation. Inflation need not take market participants entirely by surprise and, in effect, it need not be very high (by historic standards). For the advanced economies in our sample, real interest rates were negative roughly ½ of the time during 1945-1980. For the United States and the United Kingdom our estimates of the annual liquidation of debt via negative real interest rates amounted on average from 3 to 4 percent of GDP a year. For Australia and Italy, which recorded higher inflation rates, the liquidation effect was larger (around 5 percent per annum). We describe some of regulatory measures and policy actions that characterized the heyday of the financial repression era.

[Razzz42]

...That which we call a rose, by any other name would smell as sweet?

The Abstract sums the entire writing up nicely. Which by the way is extremely long and detailed.

Going negative with interest rates, for a stealth robbing of citizens monies, would certainly pay off our debts eventually. So, attempting to pay down debt by any means with all the pains of no economic growth and decades of scrimping and saving would go for naught since Congress never stops spending and keeps adding to the debt.

[Razzz42]

Abreviated details here.

[phockthis]

sfl

[bruinbirdman]

"The Abstract sums the entire writing up nicely"

Or more abstract, "MELLONESQUE LIQUIDATION"

Thus, financial repression is most successful in liquidating debts when accompanied by a steady dose of inflation.

Family guy: 12-30-2010

yitbos

[dadfly]

madison sums it up better. he calls it “wickedness.”

[ConjunctionJunction]

Pfl.

[Jack Hammer]

THE LIQUIDATION OF GOVERNMENT DEBT...

WILL NEVER HAPPEN.

[DaxtonBrown]

The problem is the Fed doesn’t just cause inflation, it also causes deflation by destroying trust which radically destroys monetary Velocity. Not getting the inflation they require from money injection spurs the Central Banks to print even more, causing a Biflationary Depression. This has been repeated since Roman times and beyond, there is no Free Lunch.
http//www.futurnamics.com/biflation.php

[DaxtonBrown]

http://www.futurnamics.com/biflation.php

[familyop]

"Or more abstract, "MELLONESQUE LIQUIDATION"

Thus, financial repression is most successful in liquidating debts when accompanied by a steady dose of inflation."

Thank you. I did some extra reading from that.

Yields should be up, but current government feeds like a vampire and keeps its debt flowing. Raise yields, and salaried government interests see debt that they are even less likely to maintain. Not that they are likely to continue such maintenance for long in the current paradigm anyway.

It's the spending. Federal funding to locales for social modifications and unneeded regulatory efforts should be cut first, IMO. That would cut much of the political action for excessive socialism (less money, less time on the hands of mostly idle public employees for political activities).

[bruinbirdman]

Look for the fed reserve to signal it's debt buying will wind down, the hint, before the election.

That should ensure The Obammunists defeat.

yitbos

[familyop]

"Look for the fed reserve to signal it's debt buying will wind down, the hint, before the election.

That should ensure The Obammunists defeat."

Thanks. Agreed on politics and somewhat looking forward to a break from Democrat socialism (as differentiated from Republican socialism). Another tightening move wouldn't surprise me at all after last summer. Banking fund managers will want the government-supported tourists to start their own debt-spending engines again soon, and fuel is already high. Tourism keeps government-linked services going.

[Okay, maybe a little heavy on the pessimism there. Heh. Much more optimistic about my own work and home activities.]