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Borrow for boom or bust?

Dickson Igwe. Photo: VINO
Dickson Igwe

The recent ten to two vote in the Virgin Islands Legislature allowing for the establishment of the Disaster Recover Agency, is a vote for transparent, accountable, equitable, measured and well audited governance.

The Virgin Islands has taken the first step down the road towards economic growth, leading to a fully developed country, after decades of non-transparent and unaccountable governance. The Disaster Recovery Agency is a platform leading the territory towards great governance.

OK. It is vital laypersons understand the global borrowing narrative. And this is why: borrowing inhabits a major portion of the economic universe of Austerity and Stimulus. Both economic cultures adopt specific postures on the matter of government borrowing, debt, and public spending. The following story is a look at national debt from the perspective of austerity.

Now, the belief of economists of a supply sided persuasion -the Disciples of Auserity- is that national debt of over 90% of GDP is bad for the economy. However, national debt of over 100% of GDP is not unusual in the present world economy.

High government debt, which begins with annual deficits that grow higher, and then become interminable like the USA debt model, eats up public revenues in the form of interest payments on the debt.

High national debt negatively impacts private savings by discouraging thrift and driving up personal credit. A highly leveraged economy is the result. The link between public and private debt is an established fact of economics. Thrift or ostentation are opposite cultures driven by government economic policy.

High leveraging means that internal and external debt levels, both consumer and business, are at a place of concern for lenders. The risk of mass bad debt rises.

Austerity Advocates believe leveraging destroys business confidence, stifles public investment, cripples government, stops business innovation, and eventually, national productivity declines.

The preceding leads to slower, and then reduced economic growth. The end result is recession or depression.

Ultimately- if uncontrolled- government is unable to pay interest on the debt. Government either restructures the debt, or goes bankrupt: the Greek Model.

Banks that have lent money to the government are unable to recover the loaned cash. When this happens, global institutions such as the IMF, World bank, or a cartel of international banks intervene to save a complete collapse of the country's banking system.

These organisations help the government to restructure its debt by further lending. Frequently, stipulations are made that handcuff government to the policies and cultures of these international organisations.

Investors and savers may lose their money invested in the banks within the territory of the defaulting country. Banks limit withdrawals. The economy goes into depression. There is a great increase in business and personal bankruptcy. Investor and consumer confidence plunge.

Government is unable to pay its way in terms of providing essential state services, and paying public servants. The economy collapses. High unemployment, business closure, and deflation are the norm as consumer demand contracts heavily. There is a banking collapse. A financial meltdown can lead to civil and political unrest. 

The preceding narrative is the central theme of the austerity culture on national debt. It is the reason Greece was left to “hang.” For Austerity Advocates, cutting spending and increasing taxation, is the answer to deficit and debt control. Austerity is part of the creative destruction model that eventually leads to renewed economic growth.

However, Stimulus advocates believe the preceding theory of unsustainable debt, deeply flawed. In a deflationary global environment where inflation is benign, and the cost of borrowing low, public borrowing- even heavy borrowing- is the single way to stimulate a recessed and contracting economy.

Eventually, a recessed economy returns to growth, and government is able to reduce its debt and annual deficits from increasing national revenue.

Fiscal and economic stimulus alone leads to real GDP growth for Jack Stimulus. Government intervention and management of the economy is non-negotiable. Post Second World War economic history is on Jack the Stimulus Advocate's side. Stimulus works!

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7 Responses to “Borrow for boom or bust?”

  • one eye (31/03/2018, 10:25) Like (5) Dislike (0) Reply
    Another great read
  • Real Economist (01/04/2018, 09:38) Like (2) Dislike (1) Reply
    Mr. Commentator; why do you keep on comparing an island village with a budget smaller than a regular US city to a real world economy. I suggest you read up on some basic theory as you are comparing mangos and soursops..
    • Models (01/04/2018, 10:16) Like (2) Dislike (0) Reply
      All models are relevant - the largest economies are macros of the tiniest and the tiniest are micros of the largest; DUH!
    • 911 (01/04/2018, 16:07) Like (0) Dislike (0) Reply
      I will not go away.
  • wet (01/04/2018, 14:46) Like (0) Dislike (0) Reply
    The most recent topic is always the most important one in the mind of a reader
  • E. Leonard (02/04/2018, 00:16) Like (9) Dislike (1) Reply
    As a result of 2 devastating Cat 5 catastrophic hurricanes in Sep 2017, Irma and Maria, along with a historic flood in Aug 2017, the VI/BVI government was thrusted in the unusual situation of defict spending to deliver vital services; it has a $50M+ in its fiscal 2018 budget. The delta may entail borrowing to make up the shortfall, creating a deficit, increasing the national debt, and increasing debt to GDP ratio. Some other locales defict spend to deliver services, increasing their debt to GDP ratio. What is the definition of GDP and is a high debt to GDP bad?

    Among many definitions, GDP is a measure of the ability to repay debt and how long it take to repay debt if all revenues were dedicated to repaying debt. For example a debt to GDP of 90% means that if government dedicates 90% of its revenue to debt it can payoff approx 90% of it in a year. However, this is not practical; often a much less percent of revenue is dedicated to debt; government has many other obligations. What is a high debt to GDP? It depends. Some scholars are of the opinion that a debt to GDP of 1) 60% for developed countries and 2) 40% for developing countries are prudent. I will take a guess that the BVI debt to GDP is about 20%.

    Further, the 2017 weather systems thrusted the BVI’s economy into a less than a boom state. Normally, an economy will under the Classical View correct itself from bust to boom through market-based solutions(laissez faire philosophy). This typically takes too long; another solution is needed. The economy has to be stimulated ( Keynesian View) to bring the economy back to full employment quickly. Consequently, the VI will have to defict spend to invest and stimulate its economy. As Dickson noted, the 10-2 vote in the HOA to set up an Agency to manage and monitor the expenditure of up to a £300M (~$403M) loan guarantee from the UK was a good start in investing in and stimulating of the BVI economy. The BVI has a challenging but great opportunity to rebuild. It must take advantage of the opportunity.
    • Disinterested (02/04/2018, 14:21) Like (6) Dislike (0) Reply
      Another stimulus hawk, promoting deficit spending to fuel the economy. Instead what are needed are some tough austerity measures to curb our voracious appetite for profligate spending. From the bloated and under performing civil service, lack of value for money on many capital construction projects, cost overruns on capital projects, ie, Tortola Pier Park, awarding contracts to inexperienced contractors, poor production, poor transparency and accountability.......etc that needs some structural adjustments. We need to demand long term and sustainable actions. Furthermore, in our rebuilding effort, people need to demand a national development plan. We cannot just replace things in like kind; lack of a national development is the terroitory’s Achilles Heel. Every in coming government doing its own thing is not a national development plan. We need to borrow but we must do so with a blue print, purpose, plan........etc. The hurricanes provided an opportunity to plan/replan, a Renaissance of sorts.......etc. let’s do dis ting but let’s do it right.

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