Deficits can matter, sometimes

Philip Coggan in The FT

Deficits don’t matter. This quote comes not from some spendthrift European socialist but reputedly from the distinctly conservative Dick Cheney, vice-president of the US from 2001 to 2009. 

According to an account by former Treasury secretary Paul O’Neill, in 2002 Cheney cited the Reagan administration as evidence for his thesis; the national debt tripled on the Republican’s watch in the 1980s but the US economy boomed and bond yields fell sharply. 

In the 20 years since Cheney’s remark, US federal debt has roughly doubled as a proportion of GDP. But 10-year Treasury bond yields are no higher than they were two decades ago; indeed they have spent much of the intervening period at much lower levels, even as debt has soared. The continuing brouhaha over the US debt ceiling has nothing to do with the willingness of markets to buy American debt; any everything to do with the willingness of politicians to honour their government’s commitments. 

However, Cheney’s sentiments have not always been borne out elsewhere. Over the past nine months the British government has discovered the problems that can occur when funding costs suddenly increase. And that has rekindled the debate over the ability of governments to run prolonged deficits. 

In one camp are the spiritual descendants of Margaret Thatcher, the former British prime minister who sought to balance budgets, arguing that “good Conservatives always pay their bills”. Modern budget hawks often say that governments should not pass on the burden of debt repayment to the next generation. Many also argue that budget deficits are caused by excessive government spending and that reducing this spending is not only prudent but will fuel economic growth. In the other camp are the majority of economists, who argue that unlike individuals, governments are in effect immortal and can rely on inflation, or future generations, to pay down their debts. 

They point out that government debt, as a proportion of gross domestic product, was very high (in both the US and the UK) in the aftermath of the second world war. That debt proved no barrier to rapid economic growth. Furthermore, ageing populations in the developed world mean there has been a “savings glut” as citizens put aside money for their retirements, making it easy to fund deficits. 

But the freedom of governments to issue debt comes with a couple of caveats. First, a country must be able to issue debt in its own currency. Many a developing country has discovered the dangers of issuing debt in dollars. If that country is forced to devalue its currency, then the cost of servicing the dollar debt soars. Secondly, countries need a central bank that is willing to support its government by buying its debt. The quantitative easing programmes of such buying has undoubtedly made it easier for governments to run deficits. 

In the eurozone crisis of 2010-12, deficits did matter for countries like Greece and Italy. Their bond yields soared as investors feared that the indebted countries might be forced to leave the eurozone. This would have either forced governments to default, or attempt to re-denominate the debt into their local currency. Greece turned to neighbours for help but found that other countries were unwilling to provide required support that unless Athens reined in its budget deficits. 

To many Eurosceptics, that proved the folly of joining the single currency. Britain was free of such constraints since it issued debt in its own currency and had a central bank that would undertake QE. Given those freedoms, the financial crisis of last autumn, which followed the mini-Budget proposed by the shortlived Liz Truss administration, was even more of a shock. 

While Truss tried to echo Thatcher’s imagery, she rejected the budgetary prudence of the Treasury as “abacus economics”. She argued that slashing taxes would lead to faster economic growth so that the deficit would disappear of its own accord as government revenues rose.  

However, the markets did not swallow the argument. The mini-Budget was followed by a spectacular sell-off in sterling and UK government bonds. The latter may have stemmed from the leveraged bets made by British pension funds on bonds. Still, the Truss team’s economic analysis failed to account for this possibility. 

Investor confidence in British economic policy had already been dented by the Brexit vote and by the rapid turnover of prime ministers and chancellors. The problem has not gone away. Data released this week showed that Britain was still struggling to contain inflation and gilt yields jumped back towards the levels reached after the mini-Budget. 

So Cheney’s aphorism needs amending. Deficits don’t matter if the government borrows in its own currency, and also has a friendly central bank, a steady inflation rate and the confidence of the financial markets. It also requires a continuation of the global savings glut. Those conditions mean there is plenty of scope for future governments to get into trouble.

Time for a great reset of the financial system

A 30-year debt supercycle that has fuelled inequality illustrates the need for a new regime writes CHRIS WATLING in The FT 

On average international monetary systems last about 35 to 40 years before the tensions they create becomes too great and a new system is required. 

Prior to the first world war, major economies existed on a hard gold standard. Intra-wars, most economies returned to a “semi-hard” gold standard. At the end of the second world war, a new international system was designed — the Bretton Woods order — with the dollar tied to gold, and other key currencies tied to the dollar. 

When that broke down at the start of the 1970s, the world moved on to a fiat system where the dollar was not backed by a commodity, and was therefore not anchored. This system has now reached the end of its usefulness. 

An understanding of the drivers of the 30-year debt supercycle illustrates the system’s tiredness. These include the unending liquidity that has been created by the commercial and central banks under this anchorless international monetary system. That process has been aided and abetted by global regulators and central banks that have largely ignored monetary targets and money supply growth. 

The massive growth of mortgage debt across most of the world’s major economies is one key example of this. Rather than a shortage of housing supply, as is often postulated as the key reason for high house prices, it’s the abundant and rapid growth in mortgage debt that has been the key driver in recent decades. 

This is also, of course, one of the factors sitting at the heart of today’s inequality and generational divide. Solving it should contribute significantly to healing divisions in western societies. 

With a new US administration, and the end of the Covid battle in sight with the vaccination rollout under way, now is a good time for the major economies of the west (and ideally the world) to sit down and devise a new international monetary order. 

As part of that there should be widespread debt cancellation, especially the government debt held by central banks. We estimate that amounts to approximately $25tn of government debt in the major regions of the global economy. 

Whether debt cancellation extends beyond that should be central to the negotiations between policymakers as to the construct of the new system — ideally it should, a form of debt jubilee. 

The implications for bond yields, post-debt cancellation, need to be fully thought through and debated. A normalisation in yields, as liquidity levels normalise, is likely. 

High ownership of government debt in that environment by parts of the financial system such as banks and insurers could inflict significant losses. In that case, recapitalisation of parts of the financial system should be included as part of the establishment of the new international monetary order. Equally, the impact on pension assets also needs to be considered and prepared for. 

Secondly, policymakers should negotiate some form of anchor — whether it’s tying each other’s currencies together, tying them to a central electronic currency or maybe electronic special drawing rights, the international reserve asset created by the IMF. 

As highlighted above, one of the key drivers of inequality in recent decades has been the ability of central and commercial banks to create unending amounts of liquidity and new debt.

This has created somewhat speculative economies, overly reliant on cheap money (whether mortgage debt or otherwise) that has then funded serial asset price bubbles. Whilst asset price bubbles are an ever-present feature throughout history, their size and frequency has picked up in recent decades. 

As the Fed reported in its 2018 survey, every major asset class over the 20 years from 1997 through to 2018 grew on average at an annual pace faster than nominal GDP. In the long term, this is neither healthy nor sustainable. 

With a liquidity anchor in place, the world economy will then move closer to a cleaner capitalist model where financial markets return to their primary role of price discovery and capital allocation based on perceived fundamentals (rather than liquidity levels). 

Growth should then become less reliant on debt creation and more reliant on gains from productivity, global trade and innovation. In that environment, income inequality should recede as the gains from productivity growth become more widely shared. 

The key reason that many western economies are now overly reliant on consumption, debt and house prices is because of the set-up of the domestic and international monetary and financial architecture. A Great Reset offers therefore opportunity to restore (some semblance of) economic fairness in western, and other, economies.

The more sex we get, the more we want

Christina Patterson: 
Bedroom farce, on stage, page or double-page spread, is, for the most part,numbingly banal

Saturday, 12 July 2008


"Sex," says the 17-year-old narrator of The Catcher in the Rye, "is something I really don't understand." Well, mate, nor do I. I only know (yes, I'm afraid I do know) that the arms of someone you don't even like – who your head, and your friends, tell you is a total shit – can feel like your natural home on this planet.


And that it's perfectly possible – drearily commonplace, in fact – to feel that a fleeting muscular contraction involving neurotransmitters, endorphins and the sure knowledge that you're king or queen of the universe, is well worth swapping for your marriage, your family, and your pride.

Whatever the Victorians, or Ann Widdecombe, or the smug marrieds on both sides of the political spectrum may say, it was ever thus. From Catullus to Chaucer to Shakespeare to those men of God, Donne and Herbert, right through to that bespectacled owl for whom sexual intercourse famously began "too late", poetry has celebrated the lips, and breasts, and buttocks, and charms of women – and men – who are not their wives. As poet and playwright John Wilmot, Earl of Rochester in The Libertine, the ever-versatile Johnny Depp reminded us that the sexual pirates of 17th-century London were just as adventurous as those in the Caribbean. He was starring with John Malkovich, whose sexually voracious Vicomte de Valmont in Les Liaisons Dangereuses will remain, for many of us, a (rather sexily) sinister but enduring image of aristocratic, decadent, pre-revolution France.

Restoration comedy bristles with brittle asides from loose ladies and rich rakes apparently set on triathlons of sexual licentiousness in plots which served as a kind of 17th-century precursor to sudoku. The tradition continued, in drama, and in life. At my mother's local theatre in Guildford the other day, I saw a play by Dion Boucicault, an Irish playwright hailed by Richard Eyre as "a Victorian Andrew Lloyd Webber", and the writer who inspired Oscar Wilde. The play, London Assurance, was written at about the time that the Brontës were dreaming up role models for future prime ministers. Lacking the wit of a Wilde, or the passion of a governess, it was, alas, merely a reminder that bedroom farce, on stage, page or in a double-page spread in a red-top, is, for the most part, numbingly, grindingly banal.

"I married him," announces a Lady Spanker at one point, "for my freedom and he married me for protection." If this was a mild subversion of the historical sexual status quo, but one not that uncommon in Western aristocracies of the past millennium, it was a relatively pithy statement of the kind of pragmatism in affairs of the heart, and genitals, that has generally prevailed. Not always able to match the biblical ideal of a man and woman joined exclusively, and monogamously, for ever and ever and ever, men, and even the odd woman, have made "arrangements". The most common, of course, has been that indispensable marital accessory, a blind eye, but some have been more complicated. H G Wells, Katherine Mansfield and Vera Brittain, according to a new book on literary love lives between the wars, are just some of the writers whose domestic, and extra-marital, lives were constructed to provide maximum freedom and minimum fuss. Not, perhaps, for the lovers squeezed into the tiny gaps in these busy, busy lives, or for the children, but you can't make a nice libertarian omelette without breaking a few little eggs.

In this lovely, liberal world, a world of kings and princes and lords and sometimes poets, cakes were eaten and retained, and laundry that was already scattered around public parks could not be seized and washed. And if your love life was alluded to in the Daily Courant or the London Gazette, who cared? You were red-blooded, goddammit, you were lusty. You had more important things to worry about than a glimpsed tryst with Emma, or Kate or Nell. Publish? Well, why not? As Wellington famously wrote on the blackmail note he returned to his lover, the courtesan Harriette Wilson, "Publish and be damned!"

That, of course, was an ice-age ago, when the market value of a private life was more on a par with poetry and less on a par with a Damien Hirst. Sex, like chocolate, and Kettle Chips,is a kind of drug – and so, unfortunately, is the media coverage of the sex lives of so-called celebs. The more we get, the more we want. It's a terrible shame, but that's the way the chocolate-chip cookie of the zeitgeist crumbles. Your love of a stripy uniform, or a Chelsea strip, or a juicy orange, allied with a nice whip, or garter, or noose, may or may not be an indication of a damaged childhood, an ability to do a job, or a lively sense of humour. And it may or may not matter.

But if you have any claims to fame, or fortune, or public office, and any sex life beyond the constraints of a 1950s-constructed norm, a sense of humour is precisely what you're going to need, in spades. We have, it seems, made our bed – or basement, or sand dune, or desk at the Admiralty Arch – and now, in the full glare of the media, and the internet, and YouTube and, of course, our children, we're just going to have to lie in it.