Carney urges prudence on debt

Notwithstanding anything I might have said or implied in this post, debt is something that must be managed carefully. It's rather difficult to run a household, much less an economy, without some use of it, but as we've seen lately it has a way of running away on people... and when it happens to a lot of people at the same time, the effect can be dramatic. Mark Carney, governor of the Bank of Canada, is urging caution in this regard:

Household debt is now the biggest risk to the financial system, even if it is not expected to climb to levels that could cripple bank balance sheets, the central bank said Thursday in its review of the financial system. It used a “stress test'' to show that rising interest rates between mid-2010 and mid-2012 would saddle a growing number of Canadians with unmanageable debt loads.

Mr. Carney, the Bank of Canada governor, who has guided monetary policy throughout the crisis, is relying on consumers to help drive a recovery juiced by his historically low interest rates. Yet he is also warning borrowers and lenders not to go overboard and to think about the consequences of hefty debt in an inevitable environment of rising rates.

It's actually a very delicate balance; discourage spending too much, and you choke off the recovery, but if you encourage it too much, all kinds of other problems start to present themselves. And either way, the government will likely have to assume a lot more debt to manage the immediate problem.

For what it's worth, I expect that Carney's prediction of rising interest rates in the near future will come to pass, and that in itself is reason for the average person to be cautious in this regard. I also expect that many governments will be forced to increase their indebtedness (which is already significant in some cases). Fortunately Manitoba has more wiggle room than most jurisdictions:

Premier Greg Selinger, delivering his first state of the province address on Thursday, exuded the steady-as-she-goes posture of the throne speech. Things are bad all over the world right now, Selinger said, but thankfully not quite as bad here in Manitoba.

He repeated the flat-is-the-new-up mantra he used on throne-speech day. He once again gave no indication that the worst consequences of a recession -- massive spending cuts, layoffs, tax increases -- will be seen here.

Critics may find this a massive rationalization. But to be honest, Manitoba's relatively stable, no-growth performance this year, and modest growth projected for next year, is looking better and better all the time.

So writes Dan Lett in the Winnipeg Free Press. Given that the other three western provinces are all running deficits, we're doing pretty well... so far. I expect we'll have to run one eventually, though.

A fresh take on deficits

We often hear that deficits are getting out of control and that we have to cut spending drastically, regardless of how much need there might be for that spending. But is it really necessary? Stephanie Blankenburg thinks not:

What to do about Britain's national debt and its annual government deficits in the here and now remained less clear. Had deficit spending not been once and for all discredited at the end of the 1970s? Was John Maynard Keynes really about budgetary spending in times of crisis or did he not rather regard fiscal expansion as a secondary tool to be employed, where absolutely necessary, alongside long-term monetary policies (low long-term interest rates) to keep business cycle fluctuations under control?

All true and valid. But for a hands-on perspective on current national debt and government deficits, it is well worth keeping in mind two basic points. First, the current deficit hysteria – to use Samuel Brittan's term – has no historical grounding. Britain's national debt currently runs at about 40% of GDP. Depending on who you believe and what parts of bank debt are counted as national debt, it is predicted to either stay close to 40% or increase to anywhere between 60% and 100% over the next few years. Between 1918 and 1961, UK national debt averaged well above 100%, remaining closer and, at times above, 200% for the best part of this period. What was achieved? Fascism was defeated and the foundations of a modern welfare state were laid. Since the mid-1970s, UK national debt has oscillated between 30% and 40%, at the beginning of the 1990s falling to below 30% for a few years. What was then achieved? Finance-led corporate capitalism rose to power, leaving behind an all but destroyed manufacturing sector in the UK, rising income inequality and, eventually, a financial sector in tatters. And last, not least, wars are being lost.

From the Guardian. Trouble is, it may be hard to sell the public on this idea, given the pathological fear of deficits that's been drummed into us for the last few decades.