The worrying problem of global debt
Any undergraduate student of economics would vouch for the fact that an economy in a recession requires a fiscal stimulus package (or more government spending and lower taxes). Such a stimulus can only be managed if the economy constrains its fiscal spending in times of growth. Restraint on spending in good times would allow the creation of a buffer for a strong fiscal policy response in the event of a downturn. This Keynesian prescription of counter-cyclical fiscal policy is expected to stabilise output of an economy over business cycle dynamics.
 
The world economy today, however, is on a problematic course. The International Monetary Fund (IMF) pointed out last week that the global debt levels have reached historical highs. In 2016, the global debt stood at $164 trillion, which was equivalent to 225 percent of global GDP. The current levels of global debt-to-GDP ratio are a whole 12 percentage points higher than the previous peak of 2009 when the governments were on a deficit spending spree in the aftermath of the global financial crisis. 
 
Also, it turns out that countries in all income groups have accumulated massive amounts of debt. In advanced countries, the debt-to-GDP ratios have hit levels not seen since World War II, while the emerging markets and middle-income countries are at levels last seen during the 1980s debt crisis. The current debt situation has been a result of the prolonged after-effects of the 2008 financial crisis, which have only recently worn off.
 
Excess liquidity is generated in a system when the economic growth rate is lower than the amount of money circulating in the economy. When banks have more money in their reserves than required, they resort to lending at lower interest rates. These low interest rates encourage higher borrowing by governments, individuals and corporates. Over the last few years, since the world was in a low-growth phase and interest rates were at rock bottom, debt was continually rising.
 
Meanwhile, the US economy, which had to resort to a similar low-interest phase, is continuing to strain its fiscal situation. Despite having massive spending obligations in the form of entitlement programmes, the Trump administration opted for generous tax cuts with no commensurate revenue generating plan. The expansionary fiscal policy has come at a time when the US economy is at its strongest in a decade. The fiscal deficit is expected to reach $1 trillion soon.
 
China is in a more precarious situation. The country has moved from being a low-leverage country in 2007 to having a debt position that is currently worse than the US. In a bid to sustain its growth story, the Chinese government authorised a decade-long debt explosion. Even though most of its debt has been accumulated by the corporate sector, a large part of it has been incurred by state-owned enterprises backed by central and local governments. So, the state has played an enabling role in inculcating the behaviour of unrestrained borrowing.
 
Now that the world economy is finally on a cyclical upswing, the escalating debt addiction needs to come to an end and fiscal buffers should be strengthened to reduce the risk of financial difficulties in case global financial conditions tighten suddenly.
 
The necessity of winding down debt levels right away has been shown in a paper published last year by David Romer and Christina Romer. After analysing 24 economies, the two economists convincingly showed that if a country has both fiscal and monetary space in time of a crisis, the economy's output contracted by less than 1 percent. However, if that was not the case, the output declines by about 10 percent. Therefore, it is absolutely vital that the world economies begin to work towards enhancing their resilience. 
 
Against this backdrop, the focus of the Indian government on the practice of fiscal restraint seems to be on the right track. The N.K. Singh Committee had recommended a combined debt-to-GDP ratio of 60 percent by 2022-23 and the IMF estimates that India will definitely miss the target but would be close enough. The only cause of concern is the deteriorating condition of state finances.
 
The Fourteenth Finance Commission had recommended anchoring the fiscal deficit of the states to 3 percent of the GSDP between 2015-16 and 2019-20. However, the states have not been able to achieve the target till date. The breaching of targets is not worrying if borrowing is undertaken to fund productive activities like improving infrastructure. But, Indian states are neck deep in debt only due to pandering to populist sentiments.
 
If the government efforts to synchronise general and state elections materialise, the fiscal deficit will take an even further hit. It would be in the best interest of the economy if such short-term political temptations are avoided. India should aim at building up its fiscal resilience while the economic situation is strong.
 
Disclaimer: Information, facts or opinions expressed in this news article are presented as sourced from IANS and do not reflect views of Moneylife and hence Moneylife is not responsible or liable for the same. As a source and news provider, IANS is responsible for accuracy, completeness, suitability and validity of any information in this article.
 

 

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    Ramesh Poapt

    2 years ago

    Good one!

    Twitter CEO takes zero salary in 2017
    Twitter CEO and co-founder Jack Dorsey in 2017 declined for the third straight year any salary. He did not take a single penny for running the micro-blogging platform.
     
    "As a testament to his commitment to and belief in Twitter's long-term value creation potential, our CEO, Jack Dorsey, declined all compensation for 2017," said a proxy statement that Twitter filed with the US Security and Exchange Commission (SEC).
     
    Dorsey, however, has shares whose value went up 20 per cent since the beginning of 2018.
     
    "As of April 2, Dorsey owned 18 million shares of Twitter, currently worth $529 million. His holdings represent 2.39 per cent of all outstanding shares," said a report in Variety on Thursday.
     
    According to the filing, Twitter CFO Ned Segal had a total compensation package worth $14.3 million for 2017.
     
    Twitter has 330 million monthly active users globally. The company is currently undergoing major overhauling steps under Dorsey to revive the company's fortune.
     
    In 2016, Dorsey received personal and residential security costs totalling $68,506.
     
    Dorsey, also the CEO of payments company Square, owns 65.5 million shares in the company which currently is worth $3.1 billion.
     
    Disclaimer: Information, facts or opinions expressed in this news article are presented as sourced from IANS and do not reflect views of Moneylife and hence Moneylife is not responsible or liable for the same. As a source and news provider, IANS is responsible for accuracy, completeness, suitability and validity of any information in this article.
     

     

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    UK banks must cut ties with Putin associates: US
    British banks must severe ties with Kremlin-linked tycoons if they want continued access to American financial institutions, the US has said as it ratcheted up its efforts to block Russian industrialists from doing business in the West.
     
    Sigal P. Mandelker, a top US Treasury official in London to meet her counterparts, said on Tuesday that British banks could face "consequences" if they continued to carry out significant transactions on behalf of the 24 influential Russians sanctioned by Washington last week, the New York Times reported. 
     
    The list included Russian President Vladimir Putin's son-in-law Kirill Shamalov and industrialists Oleg Deripaska and Viktor Vekselberg.
     
    "These are blocking sanctions," said Mandelker, Under Secretary of the Treasury for terrorism and financial intelligence. 
     
    "There of course would be consequences for UK financial institutions" that continued to do business with the Russians, he warned.
     
    The warning, according to the daily, resonated in London as for decades it has served as a haven for Russia's wealthiest families. Russian investors own iconic British assets like the Chelsea Football Club and swaths of high-end London real estate and they support thriving networks of lawyers, financial advisers and estate agents.
     
    Mandelker said there had been great unity on Russia among European nations since March 4 when former Russian double agent Sergei Skripal was found poisoned in southwestern England. 
     
    She said the US was consulting intensively with British financial institutions and oversight agencies as it prepared to impose the latest round of sanctions.
     
    "We have very strong and close allies and partners in the UK," she said. "They understand clearly what the risks are. We continue to communicate those risks to them."
     
    The new US sanctions expose financial institutions outside the US to penalties if they "knowingly facilitate significant financial transactions" on behalf of the listed Russian oligarchs.
     
    Disclaimer: Information, facts or opinions expressed in this news article are presented as sourced from IANS and do not reflect views of Moneylife and hence Moneylife is not responsible or liable for the same. As a source and news provider, IANS is responsible for accuracy, completeness, suitability and validity of any information in this article.
     

     

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