Replies to post #222799 on Biotech Values

[dangerM]

Off-topic / I even took one or two courses in economics (please don't ask questions about curves and models .. that was some time ago*), and still am flabbergasted:

Take a look at Japan and their Debt/GDP ratio(https://tradingeconomics.com/japan/government-debt-to-gdp). I've been wondering about that for about 15 years (and I think it was at ~ 140% that time ago). As you could see, cynically speaking, debt and deficits are irrelevant, only debt service counts and at a zero interest rate that's not a problem. But what will happen when inflation breaks out in Japan? The central bank will not be able to raise interest rates or if it does the government will bankrupt? Or maybe at that time mostly the central bank might own government debt and simply refund the interest payments or just print the money which the government needs for interest payments? No idea.

For the Euro zone, there is the so-called "stability pact" ("Maastricht criteria"). The rule set has been changed/weakened over time, but the key rule is to demand a deficit below 3% of GDP from each of the Euro zone member states. There is a model behind this that implies a stable 80% Debt/GDP ratio even over time as long as the deficit stays below or at 3% of GDP. Obviously there are more than one country in breach of that. And we had quite some discussions about financing of national member states by ECB programmes. So now the ECB just made an announcement of ending their APP (asset purchase programme ... concerning various types of debt, also private company's debt) setting the path to end quantitative easing in Europe. Now what about Italy? No idea.

For the US, I am also frightened by the debt and the deficit. On the positive side, as long as there are (foreign) investors, issuing/rolling over debt is no problem. Funnily enough, if anyone has looked at emerging markets and their miserable performance this year, some explanation for this could be some primacy of the US as debtor. Raising interest rates actually makes investing in US debt more attractive! Would you prefer a 3pct interest rate paid by the Treasury or (inflation and exchange rate adjusted) the same paid by some banana state/foreign company? There are some people arguing that "the government crowding out private debt issuers" has to be seen internationally and not only within a country as is usually taught ... so the Treasury does not take away investors that buy a bond by Apple or Merck, but investors that had bought some bond from say a company in Malaysia and now see a better yield in the U.S. (see also https://voxeu.org/article/fiscal-multipliers-are-larger-when-foreigners-hold-debt). This makes me somewhat pessimistic for emerging markets at the moment.

At last, what is debt? Of the many graphs you see in the internet on this topic, this is the most impressive (from a random hedge fund manager, definitely not me):

National debt is just the tip of the iceberg.

Unfunded liabilities such as Medicare, Social security, and pensions dwarf this amount by a factor of 10. pic.twitter.com/KmTXSEOaNa

— The Long View (@HayekAndKeynes) May 21, 2018

So implicitly the current rules for Medicare and Social security mean quite a large comittment for the future. What will change? Maybe less benefits, changing the comittments? Maybe cost pressure for the health sector (ugh, in this forum, but actually good for society)? Possibly, but I have no idea over what time frame.

(end of sermon, sorry, has been a bit long to read)


* you see, I still use the term "GDP" instead of "GNI" which is the more modern/correct term

[jbog]

Dewophile,

After watching the 2008 debacle, the government will manufacture a solution. Key is that we still stay the best of the group.

You said you heard it all, how about this one. I've always said that the worst word ever created was the world Trillion. This year U.S. will be knocking on almost a Trillion dollars in deficit which will be added to the debt which is over $21 Trillion.

Now to put this in a term we can understand just think that One Trillion Seconds ago was 29,691 BC!

Have a nice weekend.