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A treatise on
version V0; septembre 25, 2013 Comments & Corrections are welcome at the following email-address : jcswork@pt.lu
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -- - - - - - - - - - - - - - - - - - - - - - - - Jean-Claude Schmitz Management & Energy Consultancy jcswork@pt.lu 25-09-13 Page 1 / 41
Introduction.................................................................................................... 3 Abstract ......................................................................................................... 4 1) Maastricht table M1: stable deficit % & growth % ...................................... 7 2) Maastricht table M2: varying deficit % & growth % ................................. 10 3) Maastricht table M3, Nominal Growth Rate for stable debt ratio ............. 12 4) Maastricht table M4 : varying NGR% versus NGRT% ............................. 14 5) Maastricht table M5 : involving the interest rate ....................................... 16 6) Maastricht table M6 : Surplus Deficit SD und Surplus Multiplicator .......... 19 7) Maastricht table M7 : Paying back the principal ? ................................... 22 8) M8 : targeting Interest rate, Surplus Multiplicator, Surplus Deficit, Public Debt ...... 24 9) Debt or Savings ....................................................................................... 27 10) Debt Ratio Stabilization: easy or difficult................................................ 28 11) zero interest debt ratio limit.................................................................... 30 12) Background of the Surface Multiplicator SM ......................................... 32 13) Natural Debt ratios with little growth and little inflation ........................... 33 14) Comments to Maastricht Criteria and ECB goals................................... 36 15) Solving the Problem with Positive Money .............................................. 38
Introduction
In Maastricht , in february 1992, the European Leaders did define a couple of criteria for public debt management that if adhered to should ensure financial stability throughout the EuroZone. MC1: Public DeBt / GDP <= 60% MC2: Public DeFicit / GDP <= 3% Also, in late spring of 2013, there was a big discussion within the world of economics (and beyond) about the 90% statement that Reinhard & Rogoff made in 2011 book This Time Is Different: Eight Centuries of Financial Folly, They essentially said that once an economy goes beyond 90% of public debt, it cannot generate growth levels anymore that would be high enough to master the debt situation. That statement was widely reflected and respected throughout the political and economic world. Empirical data had been used within an Excel file to come up with the statement, it was found earlier this year (by Thomas Herndon, Michael Ash and Robert Pollin of the University of Massachusetts, Amherst ) that some of the Excel sheet calculation was wrong and some data had not been satisfactorily included. This paper here aims at examining the issue of perpetual deficits and debts, and shows under which circumstances the debt to GDP ratio could be kept constant in stagnating or growing economies. But it does not mean that I would support this kind of strategy, I just want to make clear under which circumstances that might work. What however I do support is solving these problems once and for all by introducing Positive-Money-no-debt, as will be seen in the last of the following chapters.
In a world with Perpetual Public Deficits and Public debts, where just to keep things going governments take up debt that they never want to pay back, this paper will look at how debt can evolve depending on the interest rates to be paid upon these debts, and on the growth rate that the economy can muster. A simulation table has been established that allows the analysis of these values on a year by year basis, the method selected is purely theoretical, based on a simple set of formulas that are precise enough for the purpose, these formulas are derived and indicated at each step. This table is extremely flexible and can serve the purpose of almost any considerations. Here a short description of the chapters that are following:
8) M8 : targeting Interest rate, Surplus Multiplicator, Surplus Deficit, Public Debt ratio
A set of formulas are derived that connect interest rate, surplus deficit, surplus multiplicator and debt. If you fix three out of these four, the last can be calculated and is over time unavoidable, whatever the starting point.
9) Debt or Savings
Depending on the set of parameters, like when the interest rate is higher than the growth rate, public debt had better be negative, that means public wealth, as there may be no stable point to be found in the debt area. Any excursion below the calculated value of wealth will then lead into relentlessly growing debt .
13) Natural Debt ratios with little growth and little inflation
We use the formulas mentioned above to determine natural debt ratios for given productivity and inflation rates, so that nominal growth is in line with the ECB criteria and economic reality. We use 2% productivity + 2 % inflation to have 2 + 2 = 4% nominal growth NGR , and calculate the Surplus Deficit SD from there backwards with SM as input. SD = NGR / SM, in this case SD% = 4% / SM. Doing that with the interest rate as parameter shows again how impossible it is to stabilize low debt ratios. Once you get into debt, within our economic system, you can only stabilize at high debt levels. The Japanese seem to have understood just that .(Abenomics; 2013)
Note: in case the same value is on both sides of the equation, the value on the right is the old one from the line above, from the year before. Also, at this level, the interest BI is not fed into one of the other formulas, that will be done at a later stage.
jcs;28-8-13
M1
start value
Public Debt
Bank Interest %
Public DeFicit%
Public DeFicit
Bank Interest
Public DeBt %
YY = YY + 1
PDB 60 63 66 69 72 75 78 82 85 88 91 95 98 101 105 108 112 115 119 122 126 130 133 137 141 145 149 152 156 160 164
BI% 5,0% 5,0% 5,0% 5,0% 5,0% 5,0% 5,0% 5,0% 5,0% 5,0% 5,0% 5,0% 5,0% 5,0% 5,0% 5,0% 5,0% 5,0% 5,0% 5,0% 5,0% 5,0% 5,0% 5,0% 5,0% 5,0% 5,0% 5,0% 5,0% 5,0% 5,0%
BI%: input
PDF% 3,0% 3,0% 3,0% 3,0% 3,0% 3,0% 3,0% 3,0% 3,0% 3,0% 3,0% 3,0% 3,0% 3,0% 3,0% 3,0% 3,0% 3,0% 3,0% 3,0% 3,0% 3,0% 3,0% 3,0% 3,0% 3,0% 3,0% 3,0% 3,0% 3,0% 3,0%
PDF% : input
BI = BI% * PDB
input value
NGR% 1,0% 1,0% 1,0% 1,0% 1,0% 1,0% 1,0% 1,0% 1,0% 1,0% 1,0% 1,0% 1,0% 1,0% 1,0% 1,0% 1,0% 1,0% 1,0% 1,0% 1,0% 1,0% 1,0% 1,0% 1,0% 1,0% 1,0% 1,0% 1,0% 1,0% 1,0%
BI 3 3,2 3,3 3,5 3,6 3,8 3,9 4,1 4,2 4,4 4,6 4,7 4,9 5,1 5,2 5,4 5,6 5,8 5,9 6,1 6,3 6,5 6,7 6,9 7,0 7,2 7,4 7,6 7,8 8,0 8,2
NGR 1 1,0 1,0 1,0 1,0 1,1 1,1 1,1 1,1 1,1 1,1 1,1 1,1 1,1 1,1 1,2 1,2 1,2 1,2 1,2 1,2 1,2 1,2 1,3 1,3 1,3 1,3 1,3 1,3 1,3 1,3
PDB% 60% 62% 65% 67% 69% 72% 74% 76% 78% 81% 83% 85% 87% 89% 91% 93% 95% 97% 99% 101% 103% 105% 107% 109% 111% 113% 115% 117% 118% 120% 122%
same as above calculation with/within above line calculation with / within same line
400
300
100
0 0 5 10 15 20 25
year 30
Comments to Table M2: Depending on the set of parameters chosen as inputs, GDP & Debt do vary a lot. The higher the deficit and the lower the nominal growth, the worse it gets
100
50
0 11 13 15 17 19 21 23 25 27 29 31 1 3 5 7 9
M2
start value input value same as above calculation with/within above line calculation with / within same line
jcs;14-7-13
M2
start value
Public Debt
Public DeFicit%
Public DeFicit
Bank Interest
Public DeBt %
YY = YY + 1
PDF% : input
BI = BI% * PDB
input value
BI% 5,0% 5,0% 5,0% 5,0% 5,0% 5,0% 5,0% 5,0% 5,0% 5,0% 5,0% 5,0% 5,0% 5,0% 5,0% 5,0% 5,0% 5,0% 5,0% 5,0% 5,0% 5,0% 5,0% 5,0% 5,0% 5,0% 5,0% 5,0% 5,0% 5,0% 5,0%
PDF% NGR% PDF 3,0% 3,0% 3,0% 3,0% 3,0% 2,0% 2,0% 2,0% 2,0% 2,0% 0,0% 0,0% 0,0% 0,0% 0,0% 0,0% 0,0% 0,0% 0,0% 0,0% 2,0% 2,0% 2,0% 2,0% 2,0% 2,0% 2,0% 2,0% 2,0% 2,0% 2,0% 1,0% 1,0% 1,0% 1,0% 1,0% 1,0% 1,0% 1,0% 1,0% 1,0% 1,0% 1,0% 1,0% 1,0% 1,0% 2,0% 2,0% 2,0% 2,0% 2,0% 2,0% 2,0% 2,0% 2,0% 2,0% 4,0% 4,0% 4,0% 4,0% 4,0% 4,0% 3,0 3,0 3,1 3,1 3,1 2,1 2,1 2,1 2,2 2,2 0,0 0,0 0,0 0,0 0,0 0,0 0,0 0,0 0,0 0,0 2,6 2,6 2,7 2,7 2,8 2,8 2,9 3,1 3,2 3,3 3,4
BI 3 3,2 3,3 3,5 3,6 3,8 3,9 4,0 4,1 4,2 4,3 4,3 4,3 4,3 4,3 4,3 4,3 4,3 4,3 4,3 4,3 4,4 4,6 4,7 4,8 5,0 5,1 5,3 5,4 5,6 5,7
NGR PDB% 1 1,0 1,0 1,0 1,0 1,1 1,1 1,1 1,1 1,1 1,1 1,1 1,1 1,1 1,1 2,3 2,4 2,4 2,5 2,5 2,6 2,6 2,7 2,7 2,8 5,7 5,9 6,1 6,4 6,6 6,9 60% 62% 65% 67% 69% 72% 73% 74% 75% 77% 78% 77% 76% 76% 75% 74% 73% 71% 70% 68% 67% 68% 68% 69% 70% 70% 69% 69% 68% 67% 67%
same as above calculation with/within above line calculation with / within same line
So, as long as Nominal GRowth is at least equal or bigger than the ratio of Public DeFicit to DeBt, the debt ratio does not rise and trouble is contained. In the next table M3, while otherwise using the same numbers than on table M2, we calculate this value NGRT% for any moment in time, by adding a column on the right with formula (F1) We see that every time NGR% is bigger or at least equal to the target value NGRT%, the debt ratio PDB% does not rise. For these occasions, NGRT% has been put to darker green in the table.
5,0% 4,5% 4,0% 3,5% NGR% 3,0% 2,5% 2,0% 1,5% 1,0% 0,5% 0,0% 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 NGRT% PDB% 60% 50% 40% 30% 20% 10% 0% 100% 90% 80% 70%
60% Public Debt, 5% interest, with varying deficit and growth debt service.
M3
start value input value
jcs;28-8-13
M3
Nominal GRowth NGRT% = Target % PDF / PDB
start value
GDP 100 101 102 103 104,1 105,1 106,2 107,2 108,3 109,4 110,5 111,6 112,7 113,8 114,9 116,1 118,4 120,8 123,2 125,7 128,2 130,7 133,4 136 138,7 141,5 147,2 153,1 159,2 165,6 172,2
BI% 5,0% 5,0% 5,0% 5,0% 5,0% 5,0% 5,0% 5,0% 5,0% 5,0% 5,0% 5,0% 5,0% 5,0% 5,0% 5,0% 5,0% 5,0% 5,0% 5,0% 5,0% 5,0% 5,0% 5,0% 5,0% 5,0% 5,0% 5,0% 5,0% 5,0% 5,0%
PDF% NGR% PDF 3,0% 3,0% 3,0% 3,0% 3,0% 2,0% 2,0% 2,0% 2,0% 2,0% 0,0% 0,0% 0,0% 0,0% 0,0% 0,0% 0,0% 0,0% 0,0% 0,0% 2,0% 2,0% 2,0% 2,0% 2,0% 2,0% 2,0% 2,0% 2,0% 2,0% 2,0% 1,0% 1,0% 1,0% 1,0% 1,0% 1,0% 1,0% 1,0% 1,0% 1,0% 1,0% 1,0% 1,0% 1,0% 1,0% 2,0% 2,0% 2,0% 2,0% 2,0% 2,0% 2,0% 2,0% 2,0% 2,0% 4,0% 4,0% 4,0% 4,0% 4,0% 4,0% 3,0 3,0 3,1 3,1 3,1 2,1 2,1 2,1 2,2 2,2 0,0 0,0 0,0 0,0 0,0 0,0 0,0 0,0 0,0 0,0 2,6 2,6 2,7 2,7 2,8 2,8 2,9 3,1 3,2 3,3 3,4
NGR PDB% NGRT% 1 1,0 1,0 1,0 1,0 1,1 1,1 1,1 1,1 1,1 1,1 1,1 1,1 1,1 1,1 2,3 2,4 2,4 2,5 2,5 2,6 2,6 2,7 2,7 2,8 5,7 5,9 6,1 6,4 6,6 6,9 60% 62% 65% 67% 69% 72% 73% 74% 75% 77% 78% 77% 76% 76% 75% 74% 73% 71% 70% 68% 67% 68% 68% 69% 70% 70% 69% 69% 68% 67% 67% 5% 5% 5% 4% 4% 3% 3% 3% 3% 3% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 3% 3% 3% 3% 3% 3% 3% 3% 3% 3% 3%
input value
same as above calculation with/within above line calculation with / within same line
same as above
3 3,2 3,3 3,5 3,6 3,8 3,9 4,0 4,1 4,2 4,3 4,3 4,3 4,3 4,3 4,3 4,3 4,3 4,3 4,3 4,3 4,4 4,6 4,7 4,8 5,0 5,1 5,3 5,4 5,6 5,7
150
3%
100
2%
50
1%
60% Public Debt to start, nominal growth gets to the target after 10 years.
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 0%
M4
start value input value same as above calculation with/within above line calculation with / within same line
jcs;28-8-13
M4
start value
Public Debt
Bank Interest %
Public DeFicit%
Nominal Growth %
Public DeFicit
Bank Interest
Nominal Growth
Public DeBt %
YY = YY + 1
PDB 60 63 66 69 72 75 78 82 85 88 91 95 98 102 105 109 113 117 122 126 130 135 140 145 150 156 162 167 174 180 186
BI% PDF% NGR% PDF 5,0% 5,0% 5,0% 5,0% 5,0% 5,0% 5,0% 5,0% 5,0% 5,0% 5,0% 5,0% 5,0% 5,0% 5,0% 5,0% 5,0% 5,0% 5,0% 5,0% 5,0% 5,0% 5,0% 5,0% 5,0% 5,0% 5,0% 5,0% 5,0% 5,0% 5,0% 3,0% 3,0% 3,0% 3,0% 3,0% 3,0% 3,0% 3,0% 3,0% 3,0% 3,0% 3,0% 3,0% 3,0% 3,0% 3,0% 3,0% 3,0% 3,0% 3,0% 3,0% 3,0% 3,0% 3,0% 3,0% 3,0% 3,0% 3,0% 3,0% 3,0% 3,0% 1,0% 1,0% 1,0% 1,0% 1,0% 1,0% 1,0% 1,0% 1,0% 1,0% 3,6% 3,6% 3,6% 3,6% 3,6% 3,6% 3,6% 3,6% 3,6% 3,6% 3,6% 3,6% 3,6% 3,6% 3,6% 3,6% 3,6% 3,6% 3,6% 3,6% 3,6% 3,0 3,0 3,1 3,1 3,1 3,2 3,2 3,2 3,2 3,3 3,3 3,4 3,6 3,7 3,8 4,0 4,1 4,3 4,4 4,6 4,7 4,9 5,1 5,3 5,5 5,7 5,9 6,1 6,3 6,5 6,8
BI%: input
PDF% : input
NGR % : input
BI = BI% * PDB
BI 3 3,2 3,3 3,5 3,6 3,8 3,9 4,1 4,2 4,4 4,6 4,7 4,9 5,1 5,3 5,5 5,7 5,9 6,1 6,3 6,5 6,8 7,0 7,3 7,5 7,8 8,1 8,4 8,7 9,0 9,3
NGR PDB% NGRT% 1 1,0 1,0 1,0 1,0 1,1 1,1 1,1 1,1 1,1 4,0 4,2 4,3 4,5 4,6 4,8 5,0 5,1 5,3 5,5 5,7 5,9 6,1 6,4 6,6 6,8 7,1 7,3 7,6 7,9 8,2 60% 62% 65% 67% 69% 72% 74% 76% 78% 81% 83% 83% 83% 83% 83% 83% 83% 83% 83% 83% 83% 83% 83% 83% 83% 83% 83% 83% 83% 83% 83% 5,0% 4,8% 4,6% 4,5% 4,3% 4,2% 4,1% 3,9% 3,8% 3,7% 3,6% 3,6% 3,6% 3,6% 3,6% 3,6% 3,6% 3,6% 3,6% 3,6% 3,6% 3,6% 3,6% 3,6% 3,6% 3,6% 3,6% 3,6% 3,6% 3,6% 3,6%
input value same as above calculation with/within above line calculation with / within same line
We have to recognize that deficit and interest rate are certainly connected, as part of the deficit is to pay for these interests, and the rest of the deficit is to help growth come about. We introduce the concept of Surplus Deficit SD, meaning the deficit that goes beyond paying for the interest. We then have the formula: PDF = BI + SD Where PDF : Public DeFicit BI : Bank Interest SD : Surplus Deficit We set the Surplus Deficit as a function of GDP, with the factor SD% : SD = SD% * GDP And we have from before : BI = BI% * PDB So we can express formula F+ now as follows: (F1) : NGRT% = PDF / PDB => NGRT% = ( BI + SD ) / PDB = BI / PDB + SD / PDB NGRT% = BI% + SD / PDB Since both SD% and PDB% are defined relative to GDP, we can also state: (F2) : NGRT% = BI% + SD% / PDB% The bigger the debt, the smaller NGRT%, but growth % always has to be bigger than the interest rate BI% ! Welcome to Abenomics On (F2), we have a special case when the Surplus Deficit is zero, that means if Deficit is made only to pay for the interest on the existing debt. In that case, we can simplify towards: (F3) : NGRT% = BI % So if we do not need to support our economy with more deficit, the debt ratio stays the same if the growth rate equals the interest rate. That sounds simple enough, whether growth will get there by itself is another matter.
400
8%
200
4%
100
2%
60% Public Debt to start, no surplus deficit SD =0; nominal growth changes every 10 years.
0 0%
11
13
15
17
19
21
23
25
27
29
31
M5
start value input value same as above calculation with/within above line calculation with / within same line
jcs;28-8-13
M5
Nominal GRowth NGRT% = BI% Target %
start value
Public Debt
Bank Interest %
Public DeFicit%
Public DeFicit
Bank Interest
Public DeBt %
YY = YY + 1
PDB 60 63 66 69 73 77 80 84 89 93 98 103 108 113 119 125 131 138 144 152 159 167 176 184 194 203 213 224 235 247 259
BI% 5,0% 5,0% 5,0% 5,0% 5,0% 5,0% 5,0% 5,0% 5,0% 5,0% 5,0% 5,0% 5,0% 5,0% 5,0% 5,0% 5,0% 5,0% 5,0% 5,0% 5,0% 5,0% 5,0% 5,0% 5,0% 5,0% 5,0% 5,0% 5,0% 5,0% 5,0%
BI%: input
PDF% NGR% PDF 3,0% 3,0% 3,0% 3,0% 3,0% 3,0% 3,0% 3,0% 3,0% 3,0% 3,0% 3,1% 3,1% 3,2% 3,3% 3,4% 3,5% 3,6% 3,6% 3,7% 3,8% 3,7% 3,6% 3,6% 3,5% 3,4% 3,3% 3,2% 3,2% 3,1% 3,0% 5,0% 5,0% 5,0% 5,0% 5,0% 5,0% 5,0% 5,0% 5,0% 5,0% 2,5% 2,5% 2,5% 2,5% 2,5% 2,5% 2,5% 2,5% 2,5% 2,5% 7,5% 7,5% 7,5% 7,5% 7,5% 7,5% 7,5% 7,5% 7,5% 7,5% 7,5% 3,0 3,2 3,3 3,5 3,6 3,8 4,0 4,2 4,4 4,7 4,9 5,1 5,4 5,7 5,9 6,2 6,5 6,9 7,2 7,6 8,0 8,4 8,8 9,2 9,7 10,2 10,7 11,2 11,8 12,3 13,0
PDF = BI
BI = BI% * PDB
BI 3 3,2 3,3 3,5 3,6 3,8 4,0 4,2 4,4 4,7 4,9 5,1 5,4 5,7 5,9 6,2 6,5 6,9 7,2 7,6 8,0 8,4 8,8 9,2 9,7 10,2 10,7 11,2 11,8 12,3 13,0
NGR PDB% NGRT% 5 5,3 5,5 5,8 6,1 6,4 6,7 7,0 7,4 7,8 4,1 4,2 4,3 4,4 4,5 4,6 4,7 4,8 5,0 5,1 15,6 16,8 18,1 19,4 20,9 22,5 24,1 25,9 27,9 30,0 32,2 60% 60% 60% 60% 60% 60% 60% 60% 60% 60% 60% 61% 63% 64% 66% 68% 69% 71% 73% 75% 76% 75% 73% 71% 69% 68% 66% 65% 63% 62% 60% 5,0% 5,0% 5,0% 5,0% 5,0% 5,0% 5,0% 5,0% 5,0% 5,0% 5,0% 5,0% 5,0% 5,0% 5,0% 5,0% 5,0% 5,0% 5,0% 5,0% 5,0% 5,0% 5,0% 5,0% 5,0% 5,0% 5,0% 5,0% 5,0% 5,0% 5,0%
input value same as above calculation with/within above line calculation with / within same line
The higher SM, the more bang for the buck. Table M6 includes SD% and SM as input values, from which NGR and therefore NGR% are derived. Since we do not restrict ourselves to paying just the interest with the new deficit, the target NGRT% is again calculated with formula (F1): NGRT% = PDF / PDB But F1 is equivalent to F2, (F2) : NGRT% = BI% + SD% / PDB% which shows that at any moment the requirement NGRT% depends directly on BI% and on SD%, but seemingly not on SM. SM comes in when real growth rate is calculated, as NGR% = SM * SD%. Since SD feeds directly to more deficit and debt, a high value of SM makes it easier to reach the desired NGR at lower NGRT%. Also, according to F2, the bigger the debt, the smaller NGRT%! Table 6 starts again with the same values as before, and adds the complexity with SD% and SM = 2,5 changing over time ( dark green marks the change ) The formulas have been modificated as necessary for the purpose. YY YY = YY + 1 Year GDP GDP = GDP + NGR Gross Domestic Product PDB PDB = PDB + PDF Public Debt BI% BI%: input Bank Interest % PDF% PDF% = PDF / GDP Public DeFicit% NGR% NGR % = NGR / GDP Nominal Growth % PDF PDF = BI + SD Public DeFicit BI BI = BI% * PDB Bank Interest NGR NGR = SM * SD Nominal Growth PDB% PDB% = PDB / GDP Public DeBt % SD% SD% : input Surplus Deficit %
M6
start value input value same as above calculation with/within above line calculation with / within same line
cs;28-8-13
M6
start value
BI% 5,0% 5,0% 5,0% 5,0% 5,0% 5,0% 5,0% 5,0% 5,0% 5,0% 5,0% 5,0% 5,0% 5,0% 5,0% 5,0% 5,0% 5,0% 5,0% 5,0% 5,0% 5,0% 5,0% 5,0% 5,0% 5,0% 5,0% 5,0% 5,0% 5,0% 5,0%
PDF% NGR% 3,0% 0,0% 3,2% 0,0% 3,3% 0,0% 3,5% 0,0% 3,6% 0,0% 6,3% 5,0% 6,4% 5,0% 6,6% 5,0% 8,2% 8,0% 8,3% 8,0% 8,3% 8,0% 8,4% 8,0% 8,5% 8,0% 8,5% 8,0% 8,6% 9,4% 8,6% 9,4% 8,6% 9,4% 8,6% 9,4% 8,6% 9,4% 8,6% 9,4% 8,6% 9,4% 7,6% 7,1% 7,6% 7,1% 7,7% 7,1% 7,7% 7,1% 7,8% 7,1% 7,8% 7,1% 7,9% 7,1% 7,9% 7,1% 8,0% 7,1% 8,0% 7,1%
PDF 3,0 3,2 3,3 3,5 3,6 6,3 6,8 7,2 9,5 10,3 11,2 12,2 13,3 14,5 15,7 17,2 18,8 20,6 22,5 24,7 27,0 26,1 28,1 30,3 32,6 35,2 37,9 40,8 43,9 47,3 50,9
Public DeFicit
PDB% 60% 63% 66% 69% 73% 77% 79% 81% 84% 85% 86% 88% 89% 90% 91% 91% 91% 91% 91% 91% 91% 91% 92% 93% 94% 95% 96% 97% 98% 99% 100%
SD% 0,0% 0,0% 0,0% 0,0% 0,0% 2,5% 2,5% 2,5% 4,0% 4,0% 4,0% 4,0% 4,0% 4,0% 4,0% 4,0% 4,0% 4,0% 4,0% 4,0% 4,0% 3,0% 3,0% 3,0% 3,0% 3,0% 3,0% 3,0% 3,0% 3,0% 3,0%
SD 0,0 0,0 0,0 0,0 0,0 2,5 2,6 2,8 4,6 5,0 5,4 5,8 6,3 6,8 7,3 8,0 8,8 9,6 10,5 11,5 12,6 10,3 11,1 11,8 12,7 13,6 14,5 15,6 16,7 17,8 19,1
SM NGRT% 2,0 5,0% 2,0 5,0% 2,0 5,0% 2,0 5,0% 2,0 5,0% 2,0 8,3% 2,0 8,2% 2,0 8,1% 2,0 9,8% 2,0 9,7% 2,0 9,6% 2,0 9,6% 2,0 9,5% 2,0 9,4% 2,4 9,4% 2,4 9,4% 2,4 9,4% 2,4 9,4% 2,4 9,4% 2,4 9,4% 2,4 9,4% 2,4 8,3% 2,4 8,2% 2,4 8,2% 2,4 8,2% 2,4 8,1% 2,4 8,1% 2,4 8,1% 2,4 8,1% 2,4 8,0% 2,4 8,0%
input value same as above calculation with/within above line calculation with / within same line
300
200
100
60% Public Debt to start, SD% & SM varying
9 2 3
19
21
60% Public Debt to start, SD%= - 2%; Paying back the debt over 20 years
50
11
13
15
17
19
21
23
25
27
29
This is another road to disaster, as the debt comes down as intended, GDP comes down as well, mostly even faster. With SM = 1, initial interest is set to BI% = 5 %, and we change that to 2 % after year 7. The debt ratio goes up at the first since GDP collapses faster than the debt. Only with lower interest rates does the debt come down a bit faster than GDP, the debt ratio decreases slowly while GDP is still collapsing. If SM is halved to 0,5, the negative effect on the economy is halved as well, (after year 15), if it is doubled to SM = 2; the effect is doubled as well. So much for austerity and taking the rot out of the system - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -- - - - - - - - - - - - - - - - - - - - - - - - Jean-Claude Schmitz Management & Energy Consultancy jcswork@pt.lu 25-09-13 Page 22 / 41
31
M7
start value input value same as above calculation with/within above line calculation with / within same line
YY 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30
Year YY = YY + 1
NGR = SM * SD
SD = ( BI + PDB / 20)
PDF = BI + SD
SD% : input
GDP PDB BI% PDF% NGR% 100 60 5,0% -3,0% -6,0% 94 57 5,0% -3,0% -6,1% 88 54 5,0% -3,1% -6,1% 83 51 5,0% -3,1% -6,2% 78 49 5,0% -3,1% -6,3% 73 46 5,0% -3,2% -6,4% 68 44 5,0% -3,2% -6,5% 64 42 2,0% -3,3% -4,6% 61 40 2,0% -3,3% -4,6% 58 38 2,0% -3,3% -4,6% 55 36 2,0% -3,2% -4,5% 53 34 2,0% -3,2% -4,5% 51 32 2,0% -3,2% -4,5% 48 31 2,0% -3,2% -4,5% 46 29 2,0% -3,2% -4,4% 44 28 2,0% -3,2% -2,2% 43 26 2,0% -3,1% -2,1% 42 25 2,0% -3,0% -2,1% 41 24 2,0% -2,9% -2,0% 40 23 2,0% -2,8% -2,0% 40 22 2,0% -2,7% -1,9% 39 20 2,0% -2,6% -1,8% 38 19 2,0% -2,5% -1,8% 38 18 2,0% -2,5% -1,7% 37 18 2,0% -2,4% -6,7% 34 17 2,0% -2,4% -6,8% 32 16 2,0% -2,5% -6,9% 30 15 2,0% -2,5% -7,0% 28 14 2,0% -2,6% -7,2% 26 14 2,0% -2,6% -7,4% 24 13 2,0% -2,7% -7,6%
BI%: input
BI = BI% * PDB BI 3 2,9 2,7 2,6 2,4 2,3 2,2 0,8 0,8 0,8 0,7 0,7 0,6 0,6 0,6 0,6 0,5 0,5 0,5 0,5 0,4 0,4 0,4 0,4 0,4 0,3 0,3 0,3 0,3 0,3 0,3
SM : input
PDF -3,0 -2,9 -2,7 -2,6 -2,4 -2,3 -2,2 -2,1 -2,0 -1,9 -1,8 -1,7 -1,6 -1,5 -1,5 -1,4 -1,3 -1,3 -1,2 -1,1 -1,1 -1,0 -1,0 -0,9 -0,9 -0,8 -0,8 -0,8 -0,7 -0,7 -0,6
NGR PDB% SD% -6,0 60% -6,0% -5,7 61% -6,1% -5,4 61% -6,1% -5,1 62% -6,2% -4,9 63% -6,3% -4,6 64% -6,4% -4,4 65% -6,5% -2,9 66% -4,6% -2,8 65% -4,6% -2,6 65% -4,6% -2,5 65% -4,5% -2,4 64% -4,5% -2,3 64% -4,5% -2,2 64% -4,5% -2,0 63% -4,4% -1,0 63% -4,4% -0,9 61% -4,3% -0,9 60% -4,2% -0,8 58% -4,0% -0,8 56% -3,9% -0,8 54% -3,8% -0,7 53% -3,7% -0,7 51% -3,6% -0,6 49% -3,4% -2,5 48% -3,3% -2,3 48% -3,4% -2,2 49% -3,5% -2,1 50% -3,5% -2,0 51% -3,6% -1,9 53% -3,7% -1,8 54% -3,8%
SD -6,0 -5,7 -5,4 -5,1 -4,9 -4,6 -4,4 -2,9 -2,8 -2,6 -2,5 -2,4 -2,3 -2,2 -2,0 -1,9 -1,8 -1,8 -1,7 -1,6 -1,5 -1,4 -1,4 -1,3 -1,2 -1,2 -1,1 -1,1 -1,0 -0,9 -0,9
SM NGRT% 1,0 -5,0% 1,0 -5,0% 1,0 -5,0% 1,0 -5,0% 1,0 -5,0% 1,0 -5,0% 1,0 -5,0% 1,0 -5,0% 1,0 -5,0% 1,0 -5,0% 1,0 -5,0% 1,0 -5,0% 1,0 -5,0% 1,0 -5,0% 1,0 -5,0% 0,5 -5,0% 0,5 -5,0% 0,5 -5,0% 0,5 -5,0% 0,5 -5,0% 0,5 -5,0% 0,5 -5,0% 0,5 -5,0% 0,5 -5,0% 2,0 -5,0% 2,0 -5,0% 2,0 -5,0% 2,0 -5,0% 2,0 -5,0% 2,0 -5,0% 2,0 -5,0%
the requirement for stable debt ratios can be reformulated as follows: PDB / GDP = constant => ( stable debt ratio) (a) PDB/GDP = (PDB + PDF ) / ( GDP + NGR ) NGR = NGR% * GDP => PDB/GDP = (PDB + PDF ) / ( GDP + NGR% * GDP ) PDB * (GDP + NGR% * GDP ) = GDP * (PDB + PDF ) PDB * GDP ( 1 + NGR% ) = GDP * ( PDB + PDF ) / GDP PDB * ( 1 + NGR% ) = PDB + PDF PDB + PDB * NGR% = PDB + PDF - PDB PDB * NGR% = PDF (b) NGR% = PDF / PDB ( = formula F1 in previous pages ) PDF = BI + SD BI = BI% * PDB SD = SD% * GDP (c) PDF = BI% * PDB + SD% * GDP PDB * NGR% = BI% * PDB + SD% * GDP NGR = SD * SM (d) NGR% = SD% * SM NGR% = PDF/PDB = SD% * SM (b) & (d) PDF = BI% * PDB + SD% * GDP (c) (e) PDF/PDB = BI% + SD% *GDP/PDB NGR% = BI% + SD% / PDB% SD% * SM = BI% + SD% / PDB% F4: (b) & (e) (d) / GDP
/ PDB
* PDB%
F4 has 4 variables : PDB%; SD%; BI%; SM and leads to 4 different formulas F5 .. F8 depending on the outcome variable desired, the other 3 are then inputs: PDB% * ( SD% * SM BI%) = SD% - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -- - - - - - - - - - - - - - - - - - - - - - - - Jean-Claude Schmitz Management & Energy Consultancy jcswork@pt.lu 25-09-13 Page 24 / 41
Here is the complete list of formulas so far, that all describe the conditions for stable PDB% with different levels of complexity: F1 : F2 : F3 : F4: NGRT% = PDF / PDB NGRT% = BI% + SD% / PDB% NGRT% = BI % (when SD% = 0) PDB% * SD% * SM = BI% * PDB% + SD%
Note: an T is attached to the variable names to mark the Targeted values F5 F6 F7 F8 PDB%T BI%T SD%T SMT = = = = SD% / (SM * SD% - BI%) SD% * (SM - 1/PDB%) BI% / (SM - 1/PDB%) BI% / SD% + 1/PDB% Public Debt ratio Bank Interest rate Surplus Deficit % Surplus Multiplicator
With the last 4 formulas, any three parameters will give a value for the fourth that would keep the debt ratio stable, the table M8 below shows exactly that.
Bank Interest % Surplus Deficit % to GDP Surplus Multiplicator Nominal GRowth NGR% = SM * SD% % DeLta Stable Public Debt PDF%T = level NGR% - BI%
F5 F6 F7 F8
PDB%T = SD% / (SM * SD% - BI%) BI%T = SD% * (SM - 1/PDB%) SD%T = BI% / (SM - 1/PDB%) SMT = BI% / SD% + 1/PDB%
The first of these lines states that with interest at BI% = 3%, SD% =2 and SM =1, your stable point is savings of 200 % rather than any level of debt, anything less than that will lead to trouble. The second line here states that you can avoid more trouble if with Debt PDB% = 60 % - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -- - - - - - - - - - - - - - - - - - - - - - - - Jean-Claude Schmitz Management & Energy Consultancy jcswork@pt.lu 25-09-13 Page 25 / 41
BI%: input
SD% = input
SM : input
DL = SM*SD% - BI%
Comments to M8: With given values of interest rate, surplus deficit and surplus multiplicator, there will be only one stable debt ratio, and things will over time evolve towards that ratio whether it is high or low.
9) Debt or Savings
Formula (F5) gives the natural debt ratio towards which an economy will drift if SD%, BI%, SM are given. F5
PDB%T = SD% / (SM * SD% - BI%)
That can only happen if SD% = 0, or if the debt is huge. If the interest rate is higher than the growth rate, the result for Public Debt is negative, that means the stable point is in savings and not in debt.
If you do not have high enough savings as given by the formula, you will get, and then ever deeper, into debt. BI% > SM * SD% = NGR% => PDF%T < 0 better have public savings than debt
If the interest rate is lower than the growth rate, you may be able to manage your public debt : BI% < SM * SD% = NGR% => PDF%T > 0
Conclusions: PDB%T negative : no stable point when in debt PDB%T positive : a stable point for that level does at least exist
What the formula also means that for a given set of SD%, SM and BI%, the debt will evolve towards a natural point as given by the formula, whether the starting point as above or below that level.
has a zero point at SM = 1/PDB% or PDB% = 1 / SM; below the level of debt given by the inverse of SM, it is almost impossible to find a stable point, as negative interest rates would then be required
SD% = 2 %
Chart M10A
For this chart, the Bank Interest Rate for stable debt ratio is calculated as a function of the debt ratio, and the Surplus Multiplicator SM. The Surplus Deficit SD% is held constant at 2% The chart shows that stabilizing a debt ratio is easier with higher surplus multiplicators, as they allow for higher interest rates to prevail. It is also easier to stabilize a bigger debt than a smaller one, as again higher interest rates are allowed for that. The intersection points with zero interest rates are each given by PDB% = 1 / SM.
F6 : BI%T
,0%
SD% = 3 %
Chart M10B
Same chart as before, this time with the Surplus Deficit SD% set to 3% If the Surplus Deficit is bigger at 3%, then the points at zero interest are the same, but the curves above that allow for higher interest rates, which will be coupled with higher growth and higher inflation.
In order to find a point that might be stabilized, it is interesting to know where the stable debt ratio eventually might be within a given set of circumstances. We have seen that F6 comes up with interest rates that go through zero at the point SM = 1/PDB% PDB% = 1 / SM or
With a debt level below the inverse of SM, negative interest rates would be required to hold the debt ratio. Negative interest rates may or may not be realistic, but they are not easily put into practice. So the difficulty with which the debt ratio can be stabilized depends on how close the situation is to asking for zero interest rates. The further away the situation is from demanding negative interest rates, the easier things will be. This underlines the importance of the Surplus Multiplicator in any economy. If SM is small, than only large debt ratios can be stabilized. To avoid negative interest rates while stabilizing some well-known debt ratios, the following minimum SMs are needed: 60 80 90 125 175 % % % % % => => => => => SM > 1,66 SM > 1,25 SM > 1,11 SM > 0,8 SM > 0,57 ( Maastricht ) ( Germany in 2013 ) ( Reinhard-Rogoff ) ( Italy, for decades ) ( Greece, 2013 ? )
Higher Surplus Multiplicators tend to be more difficult to achieve, so it is easier to stabilize a 90% than a 60% debt, as the curve comes back to lower SM levels with bigger ratios. (see chart below)
Small debt ratios have a hard time maintaining themselves without negative interest rates. Only negative surplus, like paying back debt, can achieve that, at the cost of serious recession, year by year, leading to the destruction of any economic activity after a while. Note: an enforcable or desirable debt level of 60% or 90 % for everyone is thus completely misguided, as it does not take account of the nature of an economy, namely its SM factor. Interesting finding in times of "austerity". - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -- - - - - - - - - - - - - - - - - - - - - - - - Jean-Claude Schmitz Management & Energy Consultancy jcswork@pt.lu 25-09-13 Page 30 / 41
F5
PDB%T =
= ((PR% + IF%) / SM ) / (SM*SD% - BI%)) = ((PR% + IF%)/SM) / (SM*(PR%+IF%)/SM - BI%) = ((PR% + IF%) / SM) / (PR% + IF% - BI%) with PR% + IF % = 4% = 4% / (SM * (4% - BI%) ) ; singularity at BI% = 4%
The calculation of the Natural DeBt ratio PDB%N= f (SM; BI%) for an economy was done for a row of values Surplus Multiplicator : Interest rates : SM = 0,5 4, BI% = 5% 3% and for 2% 1%
0%
Comments:
This chart mans that in order to stay at 60 %, you need very high SM values or very low interest rates, or rather both. With an SM = 1; you can live with a debt ratio of 133% and a 1 % interest rate, all the while generating 2 % growth and 2 % inflation. If the interest rate happens to be 2 %, you will have to live with 200 % debt, or evolve towards that state of affairs. Again, a 90 % debt is easier to live with than trying to hold onto a 60 % debt, and 100% is easier than 90%. So much for the Reinhard-Rogoff discussion. It all comes down to "natural values " that you cannot escape, if you try anyway, disasters loom. If you are below the natural ratio, you will slowly get there, if you are above, you will come down to it by the forces of financial gravity. If the interest rate is higher than the growth rate, only savings are ok, debt cannot be managed and will run away. The chart also shows that 3 % interest is already more than any state can carry, when we want a bit of growth and not more than a couple of % inflation. Small wonder that these days (2013) Central Banks bring down the interest rates, and that bond rates are coming down with them.
300%
Debt Ratio
200%
100%
0% 0 1 2 3 4
SM
5
BI%=3%
-100%
-200%
PR% + IF% NGR% / SM SD% / (SM * SD% - BI%) 2,0% BI%=2% 400% 333% 286% 250% 222% 200% 182% 167% 154% 143% 133% 125% 118% 111% 105% 100% 95% 91% 87% 83% 80% 77% 74% 71% 69% 67% 65% 63% 61% 59% 57% 56% 54% 53% 51% 50% 1,0% BI%=1% 267% 222% 190% 167% 148% 133% 121% 111% 103% 95% 89% 83% 78% 74% 70% 67% 63% 61% 58% 56% 53% 51% 49% 48% 46% 44% 43% 42% 40% 39% 38% 37% 36% 35% 34% 33% 0,0% BI%=0% 200% 167% 143% 125% 111% 100% 91% 83% 77% 71% 67% 63% 59% 56% 53% 50% 48% 45% 43% 42% 40% 38% 37% 36% 34% 33% 32% 31% 30% 29% 29% 28% 27% 26% 26% 25% 5,0% BI%=5% -800% -667% -571% -500% -444% -400% -364% -333% -308% -286% -267% -250% -235% -222% -211% -200% -190% -182% -174% -167% -160% -154% -148% -143% -138% -133% -129% -125% -121% -118% -114% -111% -108% -105% -103% -100%
or, as a first, nominal growth rate needs to be bigger than the interest rate, and if your deficit goes beyond just paying for the interest, as a second, the resulting growth rate of the economy has to be bigger than the growth rate of debt.
Simple enough That sounds easier than it is, since we do not want high inflation either, so nominal growth is limited to the sum of the targeted inflation + expected productivity increases. In the EuroZone, 2% inflation is targeted for to keep serious inflation as well as deflation at bay. At the same time, the EuroZone does not want to go beyond 3 % deficits. All these rules limit the room for manoeuver, and together with the 60% debt limit, it turns out that they are incompatible with saving any economy that is in trouble. They actually stand in the way of saving the economy, and push it further into the ground. MC1: 3% of GDP as maximum Public DeFicit (PDF) for the year, and MC2 : 60 % of GDP as maximum Public DeBt (PDB ) seem to have been chosen so that at an 5 % interest rate, which was not unusual at the time (1990) , it looked as if the debt would pay for itself: 5 % of 60% is 3% Unfortunately, last year's deficit gets added to last year's debt and the sum gives the new debt, which then stands at 63 % and not 60 % anymore. Unless there is enough growth to make this 63 look smaller in comparison. So when no effort is done to jump-start the economy by more debt, it needs - growth of the same percentage as the interest rate to keep the debt ratio constant - and growth bigger than that if the debt ratio has to shrink. This is true whatever the actual debt ratio, but only if all the deficit goes to debt service. Now since debt service alone does hardly generate any growth, asking for growth of the same magnitude or bigger than the interest rate is a tall order.
The formulas have been adapted to reflect these purposes. YY Year YY = YY + 1 GDP Gross Domestic Product GDP = GDP + NGR PDB Public Debt PDB = PDB + PDF BI% Bank Interest % BI%: input PDF% Public DeFicit% PDF% = PDF / GDP NGR% Nominal Growth % NGR % = NGR / GDP PDF Public DeFicit PDF = BI - DPOS IPOS Positive money to pay for debt interest IPOS = BI IPOS% Positive money to pay for debt interest IPOS% = IPOS / GDP PPOS% Positive money % to pay for debt principal PPOS% : Input PPOS Positive money % to pay for debt principal PPOS = PPOS% * GDP DPOS Positive money % to pay for debt DPOS = PPOS + IPOS DPOS% Positive money to pay for debt DPOS% = DPOS / GDP GPOS% Positive money % to pay for growth GPOS% : Input GPOS Positive money for growth GPOS = GPOS% * GDP TPOS total positive money TPOS = DPOS + GPOS TPOS% total positive money % TPOS% = TPOS / GDP APOS Accumulated Positive Money APOS = APOS + TPOS BI Bank Interest BI = BI% * PDB NGR Nominal Growth NGR = SM * GPOS PDB% Public DeBt % PDB% = PDB / GDP SM Surplus Multiplicator SM : input
Comments to Table PM1: So this is what it takes to solve the public debt part of our monetary problem (2013), and avoid trouble in the future as well: Create enough positive money for the following 3 purposes: (1) pay the interest on the public debt (2) pay back the principal over time (3) inject some % of GDP to enable growth that reflects the possible increases in productivity and workforce This last point on workforce is important: If we know that workforce is increasing by say 2,5 % per year, and hopefully GDP will increase for that reason as well, we have to inject money into the system to reflect the target GDP. Failing to do so will just generate the next crisis of youth unemployment. How much real growth will eventually result will be up top the economy, whether it keeps the multiplicator high or not, whether it spends money on reasonable investment or not, whether it uses the money for inflation or savings. That is not a monetary issue, but more of a fiscal and a business issue. In the chart, generation of positive money to cover debt has been stopped as soon as public debt has been repaid. It is however advisable to continue generating more positive money in order to run total private debt down to reasonable levels as well, and then keep it there. If inflation goes up too fast, the multiplicator is higher than expected, and the injection of positive money for growth can be slowed down. The Central Bank would be managing these aspects. Or the finance minister can increase taxes.