A recent 21 page Bank of International Settlementsâ€™ paper (BIS) “The Future of Public Debt: Prospects and Implications” says the fiscal problem of the world is coming to “boiling point” with higher debt “clearly on the horizon”. BIS asks a great question:
When, in the absence of fiscal actions, will investors start demanding a much higher compensation for the risk of holding the increasingly large amounts of public debt that authorities are going to issue to finance their extravagant ways? In some countries, unstable debt dynamics, in which higher debt levels lead to higher interest rates, which then lead to even higher debt levels, are already clearly on the horizon.
Since the banking crisis began, government debt has grown from 85% and higher, yet that doesn’t take into account the demographic profiles of various OECD countries. “The ratio of old-age population to working-age population is projected to rise sharply. Interestingly, this rise is concentrated in countries such as Japan, Spain, Italy and Greece, which are already laden with relatively high debts. Added to population ageing is the problem posed by rising health care costs.”
When a country starts from an already high level of public debt, it raises the probability that a given shock will trigger unstable debt dynamics. Knowing this, we would expect investors to demand a higher risk premium for holding the bonds issued by a highly indebted country.
…a government intent on maintaining a given level of public services and transfers must raise taxes as debt increases. Taxes distort resource allocation, and can lead to lower levels of growth. Given the level of taxes in some countries, one has to wonder if further increases will actually raise revenue.
Last but not least, the existence of a higher level of public debt is likely to reduce both the size and the effectiveness of any future fiscal response to an adverse shock. Since policy cannot play its stabilising role, a more indebted economy will be more volatile.
In the aftermath of the financial crisis, the path of future output is likely to be permanently below where we thought it would be just several years ago. As a result, government revenues will be lower and expenditures higher, making consolidation even more difficult. But, unless action is taken to place fiscal policy on a sustainable footing, these costs could easily rise sharply and suddenly.
I have just captured some high points. It’s a good article to read. Bottom Line: the PTB would probably support some incident that would just kill off seniors. Horrible sure, but it would sure solve a myriad of fiscal problems!
Failing the die-off of the seniors, we absolutely must get a handle on our debt!