12
Sep

The importance of being idle (regarding public deficit)

Escrito el 12 Septiembre 2009 por Mikel Aguirre en Economía Global

This week while I was reviewing some quotes of famous politics and I met this one:

“(Reagan proved) Deficits don’t matter”, Dick Cheney –former vice president of the US to Treasury Secretary Paul O’Neill in 2002.

 

During a long period of time Europeans thought that a deficit over 3% (in Spain we had an obsession for deficit 0% of GPD) was supposed to mean economic disaster, as the government borrowing put private investment out of the system and investors asked for higher interest rates on Treasuries to compensate the country weaker finances.

The history is that during Ronald Reagan presidency, deficits stayed above 4% for five straight years and the interest rates and the economy rocketed

 

Right now we have similar situations where the US deficit is now above 50% of GDP and rising.  Twenty years ago the US bond were eagerly demanded by Japanese and now China has joined as a big buyer of treasuries while the interest rates stay low and the economy begins a slightly recuperation ( or at least stopping the free fall).

 

Regarding the other clear case of an OCDE country with an enormous deficit, who are the Chinese or Japanese for the Spanish treasuries?

This same week Moody’s maintained the AAA qualification to Spain.  Mr. Pierre Cailleteau head of the country risk rating agency said that this decision was taken as an answer to the political guidelines, showing a clear goal of reducing the public spending (¿?).  These last weeks the headlines of the Spanish newspapers (economics or not) had been packed with news regarding more public spending and a rising in direct or indirect taxes to citizens.

Why does not exist a perceptible pressure of the financial markets to reduce the deficit?

When will Spanish public deficit begin to matter? (Deficits don’t matter until they do –Justin Fox Time magazine)

Comentarios

Mariana Tejerina 14 Septiembre 2009 - 21:56

The countries that have better caped the global crisis in LA are the ones that have followed a neutral targeted policy with public surplus in the last years… shouldn’t this be seen as a behavior to promote?

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