06 November 2011

Skewed Data Skews Policy-Making

I was reading an article by George J Hall on how government deficits are calculated:

Mr Hall makes a serious error that is common to virtually all economists. He talks of debts in real terms and costs in real terms.

Real terms do not throw any significant light on the issue he discusses and certainly not on the issue of Greek and other Sovereign debts. Namely, whether or not the interest paid on a government's debt is greater than the rate of growth of GDP.

If the interest is exactly equal to that rate of growth of nominal GDP then there is a case for saying that it should be excluded from the government's net deficit or net surplus revenue account.

The point is very important in the context of current debates because policy confusion results from misleading data.

If government debt was restructured so that interest up to the level of GDP growth % p.a. was indexed, then we would really be able to see the marginal interest above that rate as being a threat or a cost that needed to be paid so as to prevent the public debt ratio from increasing.

Furthermore if that restructuring took place, that marginal interest rates cost would not vary as the rate of growth of GDP varied.

In an economic slowdown the public debt ratio (Sovereign Debt as a % of GDP) would not rise the way that it does at present when using Fixed Interest Bonds. 

Furthermore, if the structure of Sovereign Debt Bonds was to change to that index-linked mode, albeit with short maturity dates, it could be used as a viable and extremely important haven for wealth saved in pension funds and elsewhere. storing wealth in this way costs nothing and it reduces uncertainty and insecurity throughout the savings industry.

In fact, I maintain that if we look at the data from this standpoint the whole game plan changes to one that can protect Greece from political catastrophe and the world from an economic slowdown.

There might be no need for any haircut or any default.

For more on this revert to the host page on these issues and/or read the early pages of my draft book on macro-economic design - another game changing site / book that deals with much wider issues - or email me at:


No comments:

Post a Comment