The debt crisis: Lessons from history

Posted: October 10, 2012 in economy
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THERE is a fascinating chapter in the IMF’s World Economic Outlook, looking at past episodes of high government debt-to-GDP ratios. It finds 26 occurrences since 1875 where developed country governments had gross debt ratios of more than 100%, and focuses on six particular examples; the UK after World War 1, the US after World War 2, Belgium in the 1980s, Italy and Canada in the 1990s and Japan over the last 20 years. These countries had varying degrees of success in getting their ratios down.The worst example, and one highlighted by Martin Wolf in the FT today, was that of the UK between the wars. Fiscal contraction (in part inspired by a newspaper campaign for a “war on waste”) was accompanied by very tight monetary policy as the UK attempted to restore sterling to its pre-war parity with the dollar (and gold). The idea was that the country needed to return to an Edwardian golden era, in which sound money and small government prevailed (admiration of the pre-1914 ethos is a lingering cultural trait; see Downton Abbey). Tight fiscal policy, high real rates and an overvalued exchange rate were a disastrous combination; the UK economy barely grew and the debt burden rose until 1933.Does the UK example mean we should take no fiscal action, as some suggest? Japan has run persistent fiscal deficits without generating significant growth; its debt-to-GDP ratio has persistently …

via Economic Crisis


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