IMF Says: By the Way, There’s a Debt Crisis

Two summers ago, we ran the Power Line Prize contest to try to focus attention on the exploding national debt. The contest was successful, in that it incentivized the production of many high-quality videos, songs, pictures, and other media that highlighted the debt crisis, which were viewed millions of times. But like all other efforts to call attention to the debt crisis, it had limited effect, if any. Periodically the debt is in the news, and then it seems to be forgotten.

Which doesn’t mean, of course, that the problem has gone away. On the contrary: a new report by the International Monetary Fund concludes that the debt crisis is worse than ever, not just in the U.S. but throughout the developed world:

Much of the Western world will require defaults, a savings tax and higher inflation to clear the way for recovery as debt levels reach a 200-year high, according to a new report by the International Monetary Fund.

The IMF working paper said debt burdens in developed nations have become extreme by any historical measure and will require a wave of haircuts, either negotiated 1930s-style write-offs or the standard mix of measures used by the IMF in its “toolkit” for emerging market blow-ups.

Debt headlines in the last few years have focused mainly on countries on the periphery of Europe, like Greece and Spain. But it simply isn’t true that richer countries, like the U.S. and Northern Europe, are in better fiscal condition:

The paper said policy elites in the West are still clinging to the illusion that rich countries are different from poorer regions and can therefore chip away at their debts with a blend of austerity cuts, growth, and tinkering (“forbearance”).

This chart shows how bad the situation has become for the world’s 22 most developed economies:


What happens when sovereign debt reaches levels that can’t be repaid? Bondholders get stiffed, and savers are collateral damage:

Financial repression can take many forms, including capital controls, interest rate caps or the force-feeding of government debt to captive pension funds and insurance companies. Some of these methods are already in use but not yet on the scale seen in the late 1940s and early 1950s as countries resorted to every trick to tackle their war debts.

The policy is essentially a confiscation of savings, partly achieved by pushing up inflation while rigging the system to stop markets taking evasive action. The UK and the US ran negative real interest rates of -2pc to -4pc for several years after the Second World War. Real rates in Italy and Australia were -5pc.

Outright repudiation of sovereign debt is unnecessary. All a country like the U.S. needs to do is inflate its currency and repay debt with cheap dollars. Some say that the Fed’s program of “quantitative easing” has already started the U.S. down that path. Inflation destroys the value of savings, of course, so if you have been saving assiduously for more than 30 years, as I have, it is an unwelcome prospect to say the least. But one way or another, when governments run out of money, they steal from those who have not been as improvident as the politicians.

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