Global Debt Crisis: Pretend and Extend?

[GoldCore]

Those who have chosen to invest in gold bars or to buy silver coins have often done so because they fear the mismanagement of the monetary system. This week has offered further reassurance that investors are right to want to own gold in a balanced portfolio because yet another fight about the US debt ceiling has concluded. The conclusion is always the same: ‘keep kicking that can’. Whilst Congress ‘celebrates’ reaching a new deal on the country’s national debt, regular citizens and the rest of the world brace for impact. 

Pretend and Extend

Rising interest rates are pushing over-indebted countries to their limits. Politicians and international agencies such as the World Bank and International Monetary Fund (IMF) stand on soapboxes shouting the need for fiscal constraint.

But mostly this is mere posturing or promises made to get one or more of; the debt restructuring, additional loans, or outcomes needed in the immediate situation. Fiscal constraint and ‘paying down’ debt largely seems to be a notion of the past – today’s solutions usually come down to debt restructuring monikered ‘pretend and extend’.  

The deal this week to raise the debt ceiling in the U.S. is an example of this mentality. The deal ‘waives’ the debt ceiling until January 2025.

This is a precarious date, as the newly elected Congress and U.S. president take office in January 2025. Congress is sworn in at the beginning of January and the U.S. president on January 25, 2025.

The debt ceiling deal doesn’t authorize new spending but allows the U.S. Treasury to issue debt for spending already authorized by Congress. In the U.S. the Democrats want to reduce the deficit (and debt) by increasing revenues through higher taxes on corporations and upper income individuals, while Republicans want cuts on spending to be what reduces debt. 

 

The growing divide between Democrats and Republicans has meant that very few from the opposite political party will support the other’s agenda. The debt ceiling deal does have some clawbacks, such as $30 billion in unspent Covid relief that wasn’t used and can’t be used now, but most of the vague provisions for spending cuts are for future years, which by then could easily be reversed or a ‘work around’ found. 

The U.S. avoided default and can continue to issue debt that the market will buy. And if markets do not buy it the U.S. Treasury can turn to the Federal Reserve to snap up the excess.

Even though the U.S. is paying a much higher interest rate this year compared to the last several years, it can continue to pay the interest on that debt by issuing more debt. For other countries, this is not the case, however. The rise in interest rates has pushed other countries to the brink and now a sovereign debt crisis is lurking. 

Lurking Sovereign Debt Crisis

Bloomberg reports this week that government defaults rise to a record in the developing world, and the debate is growing frantic over how to solve these debt crises. Restructuring talks are stalling, with some countries turning to old-school sweeteners and others calling to revamp the Group of 20’s Common Framework. 

The additional government debt issued during covid coupled with the rapid rise in the U.S. dollar post covid has pushed five developing countries into default with eleven others identified as trading at distressed levels. 

Five Countries Linger in Default as Risk Mounts in Others Chart

The Group of 20 Common Framework was “launched in 2020 as a mechanism to provide a swift and comprehensive overhaul to nations buckling under debt burdens after Covid-19 shock that would reach beyond temporary debt payment moratoriums.”

However, to date, no country has been able to utilize the new framework. This means that many poorer countries have been locked out of markets for financing ongoing government budgets. During the time of the lockout, it is indeed very difficult for the country, and recession is generally imminent.

Typically, once an agreement is reached the debt is restructured. Creditors usually suffer some losses and in time the market ‘forgets’. After everyone has forgotten the subject country sees borrowing costs come down again and the government borrows until the cycle repeats.

Moral Hazard is Rising

The elephant in the room is that moral hazard is rising – governments and investors are counting on international institutions and central banks to step in and limit or eliminate the losses on not only government debt. 

During the Great Financial Crisis and following European Debt Crisis central banks were reactive to developing crises in financial markets and sovereign debt. Post covid central banks are much more proactive in creating programs and providing guarantees.

 For example, only after the crisis had erupted in Greece and contagion was feared across the Eurozone did the ECB create the Outright Monetary Transactions programme to buy distressed debt. Furthermore, this program was only accessible after the government with the distressed debt negotiated with the European Stability Mechanism a bailout or a line of credit.

In contrast, last year, when the ECB started raising rates, the ECB created the Transmission Protection Instrument (TPI) as a precaution in case markets perceived that a country’s debt was in crisis.

This immediately lowered the spread between countries’ debt in the Eurozone (for example Italy’s 10-year yield declined by around 75 basis points, to a spread of 185 basis points above Germany’s 10-year yield). In order to access the TPI countries only need to be “in broad compliance” with the bloc’s fiscal rules, but even this is subjective as Italy’s debt to GDP is 144.4%, with a deficit of 8% of GDP in 2022.

The previous general bloc’s fiscal rule of debt to GDP of under 60% and a deficit of under 3% of GDP is being re-evaluated and will be more subjective to each country’s fiscal situation.

Gareth Soloway – This is the catapult that will send gold to new highs

 

The ECB has not been ‘challenged’ by the market to carry out its promise of support yet, but in our view, as interest rates rise further that day is coming in the not too distant future, as it is for other countries outside the currency bloc.

How long the era of ‘pretend and extend’ on sovereign debt will continue has yet to be seen – but eventually eras and cycles shift and usually the pendulum swings far in the other direction before moving back. Gold and silver investors will be rewarded when it does shift. 

[HonestMoneyGoldSilver]

In the U.S. the Democrats want to reduce the deficit (and debt) by increasing revenues through higher taxes on corporations and upper income individuals, while Republicans want cuts on spending to be what reduces debt ..... The growing divide between Democrats and Republicans has meant that very few from the opposite political party will support the other’s agenda

The Democrats destroy everything they touch. What the Democrats and Governor Newsom have done to California is tantamount to treason. How can Democrats be this myopic and ignorant of history and finance? Raising taxes on corporations and individuals has been proven time and time again to reduce the tax revenue, not increase it:

Corporation Tax rise cancellation – factsheet - GOV.UK (www.gov.uk)

• Under the previous government’s plans, the rate of Corporation Tax was to increase from 19% to 25% from April 2023 for firms making more than £250,000 profit, around 10% of actively trading companies.
• Companies making between £50,000 and £250,000 would also face a rise in Corporation Tax, with the rate increasing incrementally from 19% to 25% depending on how much profit a firm was making. For the remaining 70% of actively trading companies, those who make profits of £50,000 or less, Corporation Tax was to remain at 19%.
• The government has now cancelled this planned increase. Rather than rising to 25% from April 2023, the rate will remain at 19% for all firms, regardless of the amount of profit made.
• At 19% the UK Corporation Tax rate is significantly lower than the rest of the G7 and the lowest in the G20.

How does cutting Corporation Tax help grow the economy and raise living standards?

• Competitive business taxes are important to growing the economy as they can incentivise investment and enterprise. The government wants to grow the economy by creating the conditions for businesses to thrive, which will create jobs and increase investment in the UK.
• Large businesses employ over 10 million workers and the government wants to support them to deliver the growth needed to boost living standards across the UK.
• The UK’s internationally competitive corporate tax system can boost business investment which drives up productivity and powers economic growth. This can result in lower prices for consumers, higher wages for employees, more jobs created as businesses grow and higher living standards in the UK.
• The Government believes that robust growth is vital to funding vital public services in the UK and keeping taxes low for working families across the UK, so that people keep more of what they earn.

What’s the evidence that cutting Corporation Tax can boost growth?

There is a range of academic evidence which suggests that cutting Corporation Tax can boost investment and growth by providing immediate support to businesses in short-term, and increasing business investment, productivity, and growth in medium-term to long-term. The strength of this relationship can be difficult to measure and is dependent on different macroeconomic factors, for example economic uncertainty or regulatory environments, with different studies suggesting different levels of impact.

• Cloyne et al. (National Bureau of Economic Research, 2022) – analysed the effects of temporary changes in US tax rates and found a corporate income tax cut leads to a sustained increase in GDP and productivity, with peak effects between five and eight years.
• Madsen, Minniti and Venturini (National Institute of Economic and Social Research, 2021) – looking into the effects of taxes on investment using data for 21 countries, this research found corporate taxes reduce investment in tangible assets and R&D; a 1 percentage point increase in Corporation Tax rate was found to lead to a 1.5 percentage point reduction in the investment rate.
• HMRC CGE modelling (2013) – assessed the effects of reducing the main Corporation Tax rate by 8 percentage points from 28% to 20% and found a boost to investment of 2.5-4.5% and 0.6-0.8% in GDP in the long term.
• Djankov et al. (National Bureau of Economic Research, 2008) – explored the effects of corporate income tax rates and found that corporate taxes are negatively correlated with growth with a 10% increase in the effective Corporation Tax rate found to reduce the investment-to-GDP ratio by 2 percentage points.

[SeverinDigsSovereigns]

2 hours ago, HonestMoneyGoldSilver said:

In the U.S. the Democrats want to reduce the deficit (and debt) by increasing revenues through higher taxes on corporations and upper income individuals, while Republicans want cuts on spending to be what reduces debt ..... The growing divide between Democrats and Republicans has meant that very few from the opposite political party will support the other’s agenda

The Democrats destroy everything they touch. What the Democrats and Governor Newsom have done to California is tantamount to treason. How can Democrats be this myopic and ignorant of history and finance? Raising taxes on corporations and individuals has been proven time and time again to reduce the tax revenue, not increase it:

Corporation Tax rise cancellation – factsheet - GOV.UK (www.gov.uk)

• Under the previous government’s plans, the rate of Corporation Tax was to increase from 19% to 25% from April 2023 for firms making more than £250,000 profit, around 10% of actively trading companies.
• Companies making between £50,000 and £250,000 would also face a rise in Corporation Tax, with the rate increasing incrementally from 19% to 25% depending on how much profit a firm was making. For the remaining 70% of actively trading companies, those who make profits of £50,000 or less, Corporation Tax was to remain at 19%.
• The government has now cancelled this planned increase. Rather than rising to 25% from April 2023, the rate will remain at 19% for all firms, regardless of the amount of profit made.
• At 19% the UK Corporation Tax rate is significantly lower than the rest of the G7 and the lowest in the G20.

How does cutting Corporation Tax help grow the economy and raise living standards?

• Competitive business taxes are important to growing the economy as they can incentivise investment and enterprise. The government wants to grow the economy by creating the conditions for businesses to thrive, which will create jobs and increase investment in the UK.
• Large businesses employ over 10 million workers and the government wants to support them to deliver the growth needed to boost living standards across the UK.
• The UK’s internationally competitive corporate tax system can boost business investment which drives up productivity and powers economic growth. This can result in lower prices for consumers, higher wages for employees, more jobs created as businesses grow and higher living standards in the UK.
• The Government believes that robust growth is vital to funding vital public services in the UK and keeping taxes low for working families across the UK, so that people keep more of what they earn.

What’s the evidence that cutting Corporation Tax can boost growth?

There is a range of academic evidence which suggests that cutting Corporation Tax can boost investment and growth by providing immediate support to businesses in short-term, and increasing business investment, productivity, and growth in medium-term to long-term. The strength of this relationship can be difficult to measure and is dependent on different macroeconomic factors, for example economic uncertainty or regulatory environments, with different studies suggesting different levels of impact.

• Cloyne et al. (National Bureau of Economic Research, 2022) – analysed the effects of temporary changes in US tax rates and found a corporate income tax cut leads to a sustained increase in GDP and productivity, with peak effects between five and eight years.
• Madsen, Minniti and Venturini (National Institute of Economic and Social Research, 2021) – looking into the effects of taxes on investment using data for 21 countries, this research found corporate taxes reduce investment in tangible assets and R&D; a 1 percentage point increase in Corporation Tax rate was found to lead to a 1.5 percentage point reduction in the investment rate.
• HMRC CGE modelling (2013) – assessed the effects of reducing the main Corporation Tax rate by 8 percentage points from 28% to 20% and found a boost to investment of 2.5-4.5% and 0.6-0.8% in GDP in the long term.
• Djankov et al. (National Bureau of Economic Research, 2008) – explored the effects of corporate income tax rates and found that corporate taxes are negatively correlated with growth with a 10% increase in the effective Corporation Tax rate found to reduce the investment-to-GDP ratio by 2 percentage points.

It makes sense to keep taxes low to promote business incentives and economic activities, and therefore the government might end up with more tax money to spend. How they spend that money is another question.

However, in our democracy a government relies on people voting for them to actually implement any policy. Democracy may not be perfect but is certainly better than an autocracy. The strength of democracy, namely consensus, is also its weakness as it is not impossible, under certain scenarios, people spontaneously and overwhelmingly decide that democracy should end.

With regards to corporate taxes, democracy works by the consensus of the majority of people who is likely not a business owner and is not directly affected by a hike in corporate taxes. There are many indirect impacts but these could be 1) compensated by other mechanisms, for example the government could hike taxes and had out free money, 2) take effect some time after a bad policy takes effect, 3) be blamed on other things.

Unfortunately there is an atmosphere of anti-business and anti-wealth in this country. This could have developed in the 70s, post-war, from the labour movements of the 1910s, or even earlier. Jealousy is a persistent theme in the human history. There is no doubt an affiliation between the anti-wealth attitude with certain ideologies and many other stances on various social issues. For example, outside of the Katherine Stock speech at Oxford Union this week there were protests where protesters also chanted "crash the stock market" "topple the system" which are relatively unrelated to the theme of said protest. And similarly stances in other social issues unrelated to the corporate taxes could lead to voting behaviour that favour parties that support an anti-business model. It is not a standalone phenomenon but a package deal, and this could result in more people appearing to support higher taxes than those who actually do. This will be reflected at the ballot boxes and consequently the top level government.

People have always made their decisions, and decisions do not come without consequences. For example, the eastern European countries were invaded by USSR and communism was imposed on them, and it was not their decision, but the people in Russia and China more or less spontaneously chose it, or stayed indifferent. And the consequence is seen.

[HonestMoneyGoldSilver]

1 hour ago, SeverinDigsSovereigns said:

It makes sense to keep taxes low to promote business incentives and economic activities, and therefore the government might end up with more tax money to spend. How they spend that money is another question.

However, in our democracy a government relies on people voting for them to actually implement any policy. Democracy may not be perfect but is certainly better than an autocracy. The strength of democracy, namely consensus, is also its weakness as it is not impossible, under certain scenarios, people spontaneously and overwhelmingly decide that democracy should end.

With regards to corporate taxes, democracy works by the consensus of the majority of people who is likely not a business owner and is not directly affected by a hike in corporate taxes. There are many indirect impacts but these could be 1) compensated by other mechanisms, for example the government could hike taxes and had out free money, 2) take effect some time after a bad policy takes effect, 3) be blamed on other things.

Unfortunately there is an atmosphere of anti-business and anti-wealth in this country. This could have developed in the 70s, post-war, from the labour movements of the 1910s, or even earlier. Jealousy is a persistent theme in the human history. There is no doubt an affiliation between the anti-wealth attitude with certain ideologies and many other stances on various social issues. For example, outside of the Katherine Stock speech at Oxford Union this week there were protests where protesters also chanted "crash the stock market" "topple the system" which are relatively unrelated to the theme of said protest. And similarly stances in other social issues unrelated to the corporate taxes could lead to voting behaviour that favour parties that support an anti-business model. It is not a standalone phenomenon but a package deal, and this could result in more people appearing to support higher taxes than those who actually do. This will be reflected at the ballot boxes and consequently the top level government.

People have always made their decisions, and decisions do not come without consequences. For example, the eastern European countries were invaded by USSR and communism was imposed on them, and it was not their decision, but the people in Russia and China more or less spontaneously chose it, or stayed indifferent. And the consequence is seen.

Nobody's voting for me but if they were, this is what I would give them:

Substantial democratic engagement in the key industries and major companies which make our economy work via shareholder ownership and rights (not communism/socialism or stealing)

The financial system owes the citizens of the UK massively. They have benefited from the "Implied Government Guarantee" and have also been the beneficiaries of numerous policy decisions. We the people have already paid for a substantial equity stake. My government would take 30% equity as we've already paid for it. I would also reduce taxes on the financial system to 10% or less. If citizenship shareholder ownership exceeded a certain threshold, it's conceivable the entire financial system could operate tax-free

Heavy industry, energy and utility companies. Everybody is up in arms about BP, Royal Dutch Shell, SSE, Centrica, British Gas, water companies, telecoms and others posting record profits and paying out shareholders. There has been a windfall tax on many of these companies, which is a disaster IMHO. I would immediately enact 0% tax on the oil and gas giants as well as the energy and other utilities. In exchange for this tax break those companies would give every UK citizen shares in those companies at a fair (marginally below market) price, some free and others paid for by government. A sovereign wealth fund directly in the hands of citizens with restrictions depending on individual circumstance - i.e. the dividends and capital gains from such ownership would be used to replace social security programs entirely. There would be zero benefits of any kind for the average person, unemployed or not

Then if BP or Shell post record profits, great, we can all benefit from it. We have to win and lose together as a country if we are ever to dispel the anti-business, anti-capitalist, anti-wealth movements. We must also be able to decide through a true representative democratic process how many jobs we export overseas and how many we retain domestically, with each of us paying the premium for UK jobs or each of us benefitting from the profits of exporting overseas

To make the UK an international powerhouse once again, to make us the best country in the world to live in, we need low taxes, strong democracy and a powerful consumer. I'd sum it up as democratic capitalism. There is nothing democratic about our current capitalist system and barely anything democratic about our current legal and political systems. They are set up to serve the elites and to punish the poor. The richest 1% have more than 25% of the UK's total wealth and this is completely irrational, inefficient and to many people, unfair. To solve our issues of inequality and undemocratic control over the masses, we must all participate in our economy together on an equal footing - as shareholders with voting rights and a share of earnings

If the UK had such a system of robust consumer inflows, virtually ZERO social security/benefits, etc, other than our NHS, we could become so prosperous and such a desirable place to live that we could once more "colonise" the entire world and make them bend to our will - a will that enriches the ordinary person, makes work pay, honours free speech, common law and ruthlessly pursues scientific advancement

Nobody is asking me though and I'm reasonably sure if anyone got close to being elected on a similar mandate to what I've described above, they would be assassinated. The last thing the elites want is to share their bread with us. The elites are happy for the UK to be poorer as a whole so long as they are still kings and we are still peasants. 

Edited June 1, 2023 by HonestMoneyGoldSilver