When deficits don’t matter

Did you know that since EU countries signed up the Stability and Growth Pact in 1998, 25 of 28 member countries have broken the rules with no meaningful penalty?

By “the rules” I mean an annual deficit-to-GDP ratio of less than 3% and a debt-to-GDP ratio of less than 60%. Those rules were designed to show fiscal stability (and growth) in the eurozone and make the euro a more credible global reserve currency alternative to the US dollar.

The good news is that only five EU countries look like breaking the 3% deficit rule this year. France, Spain, Greece, Croatia and the UK will breach the limit, according to economists surveyed in January by Bloomberg. Another three countries – Finland, Poland and Romania – are in the danger zone.

The other good news – which you might choose to see as bad news – is that this will be the lowest number of EU countries in breach of the deficit target since the start of the financial crisis in 2008. Everyone – apart from the fiscally flummoxed five – seems to have gotten their house in order. Why could that be bad news?

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When you’re on the frontiers of monetary policy – with negative interest rates and ineffective quantitative easing – the response to the next crisis will be larger government deficits. The justification for those deficits will come from things like the chart above. The last G-20 summit called for more fiscal stimulus. Get used to hearing that.

Who knows what governments will spend the borrowed money on? Stocks? Bonds? Wars? Probably all of the above – and all as effective as previous “stimulus” measures. Which means “not very”. Meanwhile, the debt tab grows.

Prison island for the elderly

If you want to know where all this is headed, look, as ever, to Japan. And prepare yourself for an old age of three square meals a day, free healthcare and a roof over your head… in prison.

That’s right. Many Japanese are preparing for retirement by living a life of crime. Statistics show that 35% of those arrested for shoplifting in Japan are over the age 60. Of those arrested, 40% have been arrested more than six times. After six repeat offences – because by then it starts to look like a pattern/strategy – you go to jail.

What an elegant solution to the problems of demography and deflation! If you can’t get people to spend money they don’t have, get them to steal things they don’t own. Once they’ve done enough stealing, you can cart them off to a jail built by “stimulus” money. The more theft, the more prisons and the more government-generated growth!

This is probably a version of what the government wants anyway; a docile population under the control of the authorities. And in some ways, it’s more efficient than a pension system or privately funded retirement. You eliminate the risk of people who can’t self-fund their old age years. And you have a perfectly legitimate excuse or larger fiscal deficits!

I know what you’re thinking. Turning an entire island into a kind of open air prison is a pretty dystopian view of the future. But how different is it from how things are now anyway? Here in Britain, if you can’t get people to shop lift more than six times, you’d have to concoct some other offence.

It’s not all that hard. Make cash illegal and you’re halfway there. Only criminals, terrorists and tax dodgers prefer cash anyway. Off to the clink with you! Enjoy your retirement.

Category: Economics

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