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Government debts are both unsustainable and desirable

Government debts are both unsustainable and desirable
Government debts today is a natural consequence of the unsustainable
debt explosion in the private sector during the last ten years

Paul de Grauwe, Eurointelligence 18/6 2009

With the bursting of the bubble, consumers and financial institutions started a painful process of reducing their debt levels. This process of “deleveraging” is necessary to kick start the economy again.
At the same time it is only possible if governments are willing to increase their debt levels.

The fundamental insight that private debt levels can only decline if government debt is allowed to increase follows from two mechanisms,
uncovered long ago by Irving Fisher and Keynes.

Once the private sector has accumulated excessive debt and suddenly all want to reduce their debt levels at the same time, this will not work. The reason is that they all want to reduce their debt burdens through either asset sales or increased savings or both. But asset sales lower asset prices, thus increasing the solvency problems for the private sector. The private sector will end in another virtuous circle if it chooses to deleverage through higher savings, as higher savings leads to lower consumption, lower production and less income to save from.

In other words: The attempts of private sector to reduce debt levels and to increase savings can only be successful if governments do the reverse, i.e. if they dissave, or more issue government debt.

Governments in the US, the UK and some European countries have understood this mechanism and have done what governments have to do to unwind the private sector’s excessive debt levels.

But now we increasingly hear that this is irresponsible and that governments should quickly bring down their debts and deficits.

Full text

Two very different theories of the business cycle

Paul de Grauwe

Anders Borg

Det är därför, tvärtemot alla tidigare teorier, budgetåtstramningar i dåliga tider kan få positiva effekter.
Olle Wästberg, fd statssekreterare hos Anne Wibble, finansminister under Carl Bildt