Wednesday, April 21, 2010

Borrowing While Poor

Borrowing While Poor

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Congress is in the midst of investigating why Alan Greenspan and the Federal Reserve did not prevent the subprime fiasco, and now the SEC is suing Goldman Sachs for fraud. But neither the investigation nor the suit addresses the most repugnant aspect of subprime lending, which is the fact that poor people are charged higher interest rates than rich people when they purchase homes, and that this is perfectly legal.

The justification that economists give for this is that the poor have a higher risk of default and must therefore pay a premium for presenting this higher risk. But it is not the borrower who is in default who pays this premium; it is the other borrowers—the ones who do not default—who pay the premium and thus cover the losses caused by the ones who do. Why should a poor borrower be held more responsible than a rich borrower for the default of another poor borrower?

This discrimination against homebuyers based on income is produced by market competition. A rich family is less likely to default, so in order to attract such families lenders offer them a lower interest rate. But someone has to pay to cover the losses from bad loans, and if rich families are given a way not to pay for these losses, then poor families end up getting stuck with the bill. While the motivation for this discrimination may be totally innocent, the result is that it frees rich families from what should be a shared responsibility, shifting it all to the poor.

Although income discrimination is similar in some ways to racial discrimination, the remedies must be radically different. Under anti-racial-discrimination laws, a lender is not guilty of discrimination if her decision not to lend to a particular individual is motivated by economic considerations. But while it’s legitimate to use the level of a borrower’s income to determine whether that borrower is creditworthy, it should not determine the level of the interest rate she is charged.

If income discrimination is to end, a law that requires banks to offer the same interest rate to all homebuyers, regardless of income, will not suffice. Under such a law, some banks would announce a low interest rate that would be offered to all, but their loan qualification criteria would exclude the poor. Other banks would probably offer a high interest rate to all, but because of the high rate their only customers would be the poor. Each bank would not discriminate, but all the banks collectively would. To solve the problem, the government should establish the criterion for borrowers’ qualifications, requiring that banks offer the same interest rate to any borrower who meets this criterion.

Of course, some would complain that such regulation would be an unwarranted expansion of government in the marketplace. But as the bailout of the banks and other financial institutions clearly showed, the loan market does not consist only of private arrangements; individual loan failures and the way they are covered have social consequences that affect all of us. When homebuyers pay back their own loans, they also pay for the losses caused by other homebuyers who are not paying back theirs. Unless the rules change, it will continue to be only the poor who pay. And that’s not fair.

Four congressmen have now moved a bill to repeal NAFTA

Thinking the Unthinkable: Could America Repeal NAFTA?

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This means, for a start, that President Obama's recent brave-faced pledge to move forward with his proposed Trans-Pacific Partnership (interestingly, the dread phrase "free trade agreement" has been carefully left out of the name) is quite likely dead on arrival. Obama himself may know this and may have staged this gesture simply to placate foreign nations and domestic corporate interests.

The lack of any change on trade issues in the Oval Office has distracted most Americans from the fact that in recent years there has been an inexorable movement away from free trade in the House and Senate, driven by the public's relentlessly rising skepticism of free trade.

For example, according to one analysis by Global Trade Watch, no fewer than seven Senate and 30 House seats flipped from pro- to anti-free trade in the 2006 election. Seventy-three percent of winning Democratic candidates in that election emphasized trade as an issue in their campaigns, while 72 percent of losing Democratic candidates did not. Not a single candidate of either party ran on free trade as a positive agenda, and not a single opponent of free trade was ousted by a free trader, in either the House or the Senate. Six anti-free-trade Democrats - Sherrod Brown of Ohio, Claire McCaskill of Missouri, Jon Tester of Montana, Bob Casey of Pennsylvania, Sheldon Whitehouse of Rhode Island, and Jim Webb of Virginia, plus Independent Bernie Sanders of Vermont - captured seats formerly held by free traders.

This trend continued in 2008. Thirty-six new free-trade opponents were elected to the House: 13 in contests against incumbents, 20 in battles for open seats, and three in special elections. (Eight free-trade opponents lost, so the net gain was 28.) And seven new free-trade opponents were elected to the Senate: Mark Begich of Alaska, Mark Udall of Colorado, Jeanne Shaheen of New Hampshire, Tom Udall of New Mexico, Kay Hagan of North Carolina, Jeff Merkley of Oregon, and Al Franken of Minnesota.

This is mainly, but not exclusively, a Democratic trend: The 2008 winners also included 10 Republican opponents of free trade who either held or won seats while campaigning against free trade. Oddly enough, given the condemnations of "protectionism" issuing from the Democratic leadership, this trend seems to be a big winner for the Democrats. For example, after the 2006 election, it was estimated that another 10 to 20 Democratic challengers might have won if they had attacked free trade.

But the Democratic Congressional Campaign Committee was headed by Rahm Emanuel (now President Obama's chief of staff), a free trader. Emanuel played a leading role in securing Democratic votes to pass NAFTA in 1993 while serving as a staffer under Bill Clinton and decided not to use the issue. But for this decision, Lois Murphy, to take only one example, might well have beaten Jim Gerlach, rated by nonpartisan observers as one of the most vulnerable Republican incumbents in the nation, in Pennsylvania's 6th district. Instead, Gerlach squeaked back in with 1.2 percent of the vote after the DCCC effectively vetoed a trade-oriented get-out-the-vote program.

But people noticed. So after declining to run ads attacking free trade in 2006, the DCCC, startled by the issue's potency even when neglected, relented and aired spots on the issue in 2008. The main thing currently impeding an even stronger response in the voting booth is simply how deeply conflicted is the public's dislike of free trade. According to one 2006 poll, the public seems frustrated about where to place responsibility. Close to eight in 10 (78 percent) say the government could do something about protecting American jobs. But a majority (52 percent) do not think it's realistic for the government to control corporate outsourcing.

So the voters register their protests when given the chance, but otherwise remain stymied in their attempts to crystallize an opinion of what solution they ultimately want. The most puzzling thing about recent public opinion polls is that while the economy consistently ranks high on voters' priority lists, trade per se does not, suggesting that voters have yet to become fully convinced that free trade, as opposed to other currently hot issues like our broken financial system, is the root cause of America's economic ills. But if trade is at least a big part of the cause, then presumably this will eventually tell upon public opinion and trade will move up voters' priority lists. This will, if recent trends are any indication, find expression at the polls and drive Congress even further away from free trade.

If nothing stops this trend, not only will it remain impossible to pass new free-trade agreements, but existing ones will become vulnerable, with NAFTA the biggest and most obvious target. NAFTA repeal by 2018 is easily a 50-50 possibility.

Four congressmen have now moved a bill to repeal NAFTA. Superficially, this means little, as passage of this bill is unlikely in the near future. But more fundamentally, it means a lot because, unbeknownst to most Americans inside and outside the Washington Beltway, free trade is inexorably losing its base of support on Capitol Hill.

Shorting The Middle Class: The Real Wall Street Crime

Shorting The Middle Class: The Real Wall Street Crime

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The press is all abuzz with news of the SEC suing Goldman Sachs for fraud. While this is certainly big news in itself, even more important is what it says about what the financial elite has been doing to America for the last 30 years: shorting the middle class.

The SEC's action is a perfect moment for us to look at the bigger picture of how the American people were sold on the promise of never-ending prosperity while Wall Street was overseeing a massive transfer of wealth from the middle class to the richest Americans.

The results have been devastating: a disappearing middle class, a precipitous drop in economic and social mobility, and ultimately, the undermining of the foundation of our democracy.

Thirty years ago, top executives at S&P 500 companies made an average of 30 times what their workers did -- now they make 300 times what their workers make. And between 2000 and 2008, the poverty rate in the suburbs of the largest metro areas in the U.S. grew by 25 percent -- making these suburbs home to the country's largest and fastest-growing segment of the poor.

The human toll of the shorting of the middle class is brought to life on sites like,, and where the casualties of Wall Street's systemic scam share their personal stories.

Looking through these sites, I came upon a story that struck me as emblematic of where America's middle class finds itself these days. It feels like a dark reboot of the American Dream. Think Horatio Alger rewritten by O. Henry.

It's the story of Dean Blackburn of Alameda, California. The first part of his life was a classic American success story. Raised in Minnesota by a single mom, a teacher, he was "middle class by default." Through a combination of smarts and hard work, he made his way to Yale, then took a succession of jobs in the growing Internet world that had him steadily progressing up the economic ladder.

Then came February 2009, when he was laid off on the last day of the month. His boss chose that day because it meant the company wouldn't have to pay for another month of his health coverage. "Looking back on it," he told me, "that hurt more than the layoff itself -- just knowing that the president of the company was exactly that calculating and that unfeeling about my own, and my family's wellbeing." The timing, Blackburn continued, "put those 'family days' and company picnics in a weird new light."

Fourteen months later, he is still looking for a new job. As he, his wife, and their 2-year-old daughter deal with the immediate financial struggles his extended unemployment has brought, Blackburn has become acutely aware of the broader implications of the shorting of the middle class. "Ultimately," he says, "it's not about a dip in corporate profits, but a change in corporate attitude -- a change that means no one's job is safe, and never will be, ever again."

It's one of the reasons he's decided to try to start his own company, NaviDate, a data-driven twist on online dating sites: "It's no longer a trade-off between doing what you love and having stability. Stability is long gone, so you better do something you love!"

Achieving middle class stability and having your children do better than you, the way you had done better than your parents, has always been the American Dream, but, as Blackburn notes, mobility now is increasingly one way: "The plateaus of each step, which can be a great place to stop a bit and catch your breath, are gone. Now, it's climb, climb, climb, or start sliding back down immediately." The result: "the odds are you're going to wind up at the bottom eventually, unless you get lucky."

Luck. That's what the American Dream now rests on. It used to be about education, hard work and perseverance, but the system is rigged to such an extent now that the way to keep your head above water is to get lucky. The middle class life is now the prize on a scratch-off lottery ticket.

In November 2008, as the initial aftershocks of the economic earthquake were being felt, David Brooks predicted the rise of a new social class -- "the formerly middle class" -- made up of those who had joined the middle class at the end of the boom only to fall back due to the recession. "To them," he wrote, "the gap between where they are and where they used to be will seem wide and daunting."

But, in the year and a half since Brooks wrote this, the ranks of the formerly middle class have swelled far beyond those who joined at the tail end of the boom.

The evidence that the middle class has been consistently shorted is so overwhelming -- and the results so potentially damaging to our society -- that even bastions of establishment thinking are on alert. In a new strategy paper, The Hamilton Project -- the economic think tank founded by Robert Rubin (a big beneficiary of the shorting of the middle class) -- argues, in the Project's own words, "that the American tradition of expanding opportunity from one generation to the next is at risk because we are failing to make the necessary investments in human, physical, and environmental capital."

Of course, it's even worse than that. We are actually cutting back on our current investment in people (see the human cost of massive budget cuts in education, health care, and social services in state after state after state -- all across America).

After reading the details of the SEC's filing against Goldman Sachs, it's hard not to come away thinking: "Why would anyone ever do business with that firm again?" Likewise, after even a cursory examination of the treatment of the American middle class by the Wall Street/Washington class over the past few decades, one should also wonder why anyone would ever do business with that crowd again. And yet, there they are, still running things at the Treasury, the Fed, and the National Economic Council.

The urgent need for the reorganization of our financial system goes far beyond the upcoming debate on new financial regulations. And it goes far beyond the media's right versus left framing. It's a question about the future of our country, and whether we are going to stop the slide toward a Third World system in which there are just two classes: those at the bottom and those at the top.

A lot of people at the top of the economic food chain have done very well shorting the middle class. But the losers in those bets weren't Goldman Sachs investors -- they were millions of hard working Americans who had heard the pitch and bought into the American Dream, only to find it had been replaced by a sophisticated scam.

Goldman Donations to Obama Presidential Campaign Totaled Almost $1 Million

New York Lawmakers Rank Highest in Goldman Donations

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U.S. Senate candidate Alexi Giannoulias pushed his Republican opponent in Illinois to give back donations from Goldman Sachs Group Inc. without saying whether President Barack Obama should return almost $1 million that bank employees contributed to his White House bid.

Obama, a political mentor and basketball buddy to Giannoulias, received the money from employees and their family members, making Goldman Sachs second only to the University of California as his biggest single source for donors in 2007 and 2008, according to the Center for Responsive Politics.

Mark Kirk, the congressman competing against Giannoulias for the seat once held by Obama, ranks sixth for donations from Goldman employees, the center’s data shows. The top five are Democratic Congressman Michael McMahon of New York, Republican Senator Richard Shelby of Alabama, and three other New York Democrats: Senator Kirsten Gillibrand, Representative Scott Murphy and Senator Charles Schumer.

“This would be a lot more interesting if Wall Street banks, joined by Mark Kirk, weren’t fighting tooth and nail against the needed reforms the administration is advocating,” Hari Sevugan, Democratic National Committee spokesman, said in a statement.

The Securities and Exchange Commission’s fraud lawsuit against Goldman Sachs has politicians gauging the fallout from taking donations from the bank.

Sevugan didn’t respond to an e-mail query when asked whether Obama plans to return money from Goldman Sachs employees. Jen Psaki, a White House spokeswoman, deferred questions about contributions to the DNC.

‘Tainted’ Contributions

Giannoulias, 34, the Illinois treasurer, criticized Kirk yesterday for taking what he called “tainted” contributions of $21,600 from Goldman Sachs employees.

Kirk, a five-term congressman from Chicago’s northern suburbs, said he wanted to “err on the side of caution” as the SEC case unfolded.

A Goldman Sachs spokesman, Lucas van Praag, declined to comment today on the question of contributions to Obama and other politicians.

Kirk, 50, said that his campaign is still determining how much Goldman Sachs employees donated to him, and that he hasn’t accepted money from the bank’s political action committee.

Goldman Giving

Goldman Sachs and its employees and family members gave $5.9 million to candidates in the 2007-2008 election cycle, the Washington-based center’s data shows. Three-quarters of that went to Democrats, the non-partisan group said.

Giannoulias’s campaign further criticized Kirk today for agreeing to return contributions to his Senate campaign and not the full $54,010 it says Kirk has taken from Goldman employees during his congressional career.

“His artfully worded pledge to return contributions made only in the current cycle offers a fig leaf of ethical propriety, but in reality is nothing more than a typical Washington politician’s trick,” Giannoulias spokesman Matt McGrath said in a statement.

Obama, 48, and Democrats in Congress are proposing the most sweeping financial regulation since the Great Depression. The personal push by the president, who plans to deliver a speech on the subject on April 22 at the Cooper Union in New York, comes as Goldman reported its net income almost doubled in the first quarter.

SEC Suit

The SEC filed a civil suit on April 16 alleging the firm failed to tell investors in a 2007 collateralized debt obligation that hedge fund Paulson & Co., which planned to bet against the CDO, helped select the underlying assets.

Goldman Sachs has denied the SEC’s accusations and Greg Palm, co-general counsel, told analysts on a conference call today that the firm didn’t intentionally mislead anyone.

Wall Street provided three of Obama’s seven biggest sources of contributors for his presidential bid. In 2007 and 2008, Goldman Sachs employees and family members gave him $994,795, Citigroup Inc. $701,290, and JPMorgan Chase & Co. $695,132.

Kathleen Strand, a Giannoulias spokeswoman, declined to provide a yes or no response when asked whether Obama should give money back to Goldman employees.

“Unlike President Obama, Republican Congressman Mark Kirk takes Wall Street money hand over fist and then votes their way every single time, including voting against Wall Street reform,” she said in a statement.

Kirk raised $2.2 million during the first quarter of 2010 and ended the period with more than $3 million in the bank, his campaign said April 7.

Giannoulias Lagging

Giannoulias raised $1.2 million during the first quarter and ended the period with that amount in the bank, his campaign said last week.

The Senate seat in Illinois is held by Democrat Roland Burris, who isn’t seeking a full term. Republicans are trying to take advantage of ethical problems experienced by Illinois Democrats, including a public corruption trial set to begin June 3 for former Governor Rod Blagojevich, who appointed Burris to complete Obama’s term.

A poll by Public Policy Polling released April 6 showed Kirk leading Giannoulias by 37 percent to 33 percent, with 30 percent undecided. The survey of Illinois voters was conducted April 1 to April 5 and has a margin of error of 4 percentage points.

The Iranian Government moves its Ministries

The Iranian Government moves its Ministries

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The Iranian Government is planning a vast operation to decentralize its ministries and national agencies. 220 000 civil servants will be expected to move from the capital towards the outlying provinces and could benefit from relocation grants corresponding to 25-50% of their salary. A total of 5 million people will be affected by the move.

Officially, this gigantic enterprise aims to optimize the sharing out of public employment and the distribution of responsibilities in the country as well as to limit the consequences of an earthquake. Unofficially, it is a measure to forestall the paralysis of the country in case of a bomb attack against Tehran by Israel or the United States and to dilute the vulnerability of the country.

The future of public debt: prospects and implications

The future of public debt: prospects and implications

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The effects of the economic crisis on the developed countries are much deeper than political pundits would have us believe. Accordingly, in 2011, the United States will have a public debt comparable to its GNP. Due to population ageing in most Western countries, forecasts say that deficits will rise sharply, making it impossible to reimburse the current debts. The fatal day will arrive when creditors will want to recover their dues and states will be plunged into bankruptcy. Such are the conclusions of a report released by the Bank for International Settlements, which have been reproduced in full below. Only those countries which will have extended working life in their societies can hope to absorb the shock.

1. Introduction

The financial crisis that erupted in mid-2008 led to an explosion of public debt in many advanced economies. Governments were forced to recapitalise banks, take over a large part of the debts of failing financial institutions, and introduce large stimulus programmes to revive demand. According to the OECD, total industrialised country public sector debt is now expected to exceed 100% of GDP in 2011 – something that has never happened before in peacetime. [1] As bad as these fiscal problems may appear, relying solely on these official figures is almost certainly very misleading. Rapidly ageing populations present a number of countries with the prospect of enormous future costs that are not wholly recognised in current budget projections. The size of these future obligations is anybody’s guess. As far as we know, there is no definite and comprehensive account of the unfunded, contingent liabilities that governments currently have accumulated.

Should we be concerned about high and sharply rising public debts? Several advanced economies have experienced higher levels of public debt than we see today. In the aftermath of World War II, for example, government debts in excess of 100% of GDP were common. [2] And none of these led to default. [3] In more recent times, Japan has been living with a public debt ratio of over 150% without any adverse effect on its cost. So it is possible that investors will continue to put strong faith in industrial countries’ ability to repay, and that worries about excessive public debts are exaggerated. [4] Indeed, with only a few exceptions, during the crisis, nominal government bond yields have fallen and remained low. So far, at least, investors have continued to view government bonds as relatively safe.

But bond traders are notoriously short-sighted, assuming they can get out before the storm hits: their time horizons are days or weeks, not years or decades. We take a longer and less benign view of current developments, arguing that the aftermath of the financial crisis is poised to bring a simmering fiscal problem in industrial economies to boiling point. In the face of rapidly ageing populations, for many countries the path of pre-crisis future revenues was insufficient to finance promised expenditure.

The politics of public debt vary by country. In some, seared by unpleasant experience, there is a culture of frugality. In others, however, profligate official spending is commonplace. In recent years, consolidation has been successful on a number of occasions. But fiscal restraint tends to deliver stable debt; rarely does it produce substantial reductions. And, most critically, swings from deficits to surpluses have tended to come along with either falling nominal interest rates, rising real growth, or both. Today, interest rates are exceptionally low and the growth outlook for advanced economies is modest at best. This leads us to conclude that the question is when markets will start putting pressure on governments, not if. When, in the absence of fiscal actions, will investors start demanding a much higher compensation for the risk of holding the increasingly large amounts of public debt that authorities are going to issue to finance their extravagant ways? In some countries, unstable debt dynamics, in which higher debt levels lead to higher interest rates, which then lead to even higher debt levels, are already clearly on the horizon.

It follows that the fiscal problems currently faced by industrial countries need to be tackled relatively soon and resolutely. Failure to do so will raise the chance of an unexpected and abrupt rise in government bond yields at medium and long maturities, which would put the nascent economic recovery at risk. It will also complicate the task of central banks in controlling inflation in the immediate future and might ultimately threaten the credibility of present monetary policy arrangements.

While fiscal problems need to be tackled soon, how to do that without seriously jeopardising the incipient economic recovery is the current key challenge for fiscal authorities. In this paper, we do not address this issue, but we note that, in our view, an important part of any fiscal consolidation programme is measures to reduce future liabilities such as an increase in the retirement age. [5] Announcements of changes in future programmes would allow authorities to wait until the recovery from the crisis is assured before reducing discretionary spending and improving the short-term fiscal position.

The remainder of this paper is organised in four sections. In Section 2, we present an examination of the recent build-up of public debt. Following the facts, we turn, in Section 3, to a forward-looking examination of the public debt trajectories in industrial countries. In Section 4, we discuss the challenges these possible future debt levels pose to both fiscal and monetary authorities. The last section concludes.

2. The facts

After a large increase during the recent financial crisis and recession, public debt ratios are set to continue to rise over the next few years. How far depends on several factors: the ultimate costs of the financial crisis, the rate of real growth and the level of interest rates, as well as political decisions about spending and taxes. The fact that structural deficits have a tendency to linger in industrial countries, together with large long-term age-related liabilities, makes the current policy in a number of countries unsustainable going forward. In this section, we summarise the factors influencing long-term fiscal imbalances and then go on to present projections of the path of debt/GDP ratios in large industrial countries.

Current and projected fiscal deficits

We start with Table 1. A key fact emerging from the table is that over the past three years public debt has grown rapidly in countries where it had remained relatively low before the crisis. This group of countries includes not only the United States and the United Kingdom but also Spain and Ireland. Although the rise in debt levels is comparatively small in countries with a history of debt problems (such as Italy and Greece), the crisis has, nevertheless, added fuel to their problems.

It is important to realise that, while the direct costs of financial crisis on governments may appear large, they are in fact relatively small compared to indirect costs arising from losses of tax revenues and increased expenditure to provide demand stimulus. Financial rescue programmes, including capital injection, treasury purchase of assets and lending as well as upfront government financing (but not debt guarantees), amount to 13.2% of GDP in advanced economies so far (see IMF (2009)) [6] – and a significant part of this is likely to be recovered.

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Fiscal situation and prospects1
1 Regional averages calculated as weighted averages based on 2005 GDP and PPP exchange rates. 2 Cyclically adjusted balance. 3 For Argentina, the Philippines and Thailand, central government debt. 4 China, Hong Kong SAR, India, Indonesia, Korea, Malaysia, the Philippines, Singapore and Thailand. 5 The Czech Republic, Hungary and Poland. 6 Argentina, Brazil, Chile and Mexico.
Sources: IMF, World Economic Outlook (emerging market economies); OECD, Economic Outlook (advanced economies).

By contrast, overall fiscal balances have been deteriorating sharply – by 20–30 percentage points of GDP in just three years. And, unless action is taken almost immediately, there is little hope that these deficits will decline significantly in 2011. Even more worrying is the fact that most of the projected deficits are structural rather than cyclical in nature. So, in the absence of immediate corrective action, we can expect these deficits to persist even during the cyclical recovery.

Based on a very comprehensive data set, Reinhart and Rogoff (2009a) report that three years after a typical banking crisis the absolute level of public debt is on average about 86% higher than prior to the crisis. In those countries where the crisis was most severe, debt almost trebled. This time around, several countries are beyond this historical average: Ireland with increases in public debt of 98% between 2007 and 2009; and the United Kingdom with projected rises of 111% by 2011. Meanwhile, the United States and Spain – with projected increases of 75% and 78%, respectively, by 2011 – are not far behind.

We doubt that the current crisis will be typical in its impact on deficits and debt. The reason is that, in many countries, employment and growth are unlikely to return to their pre-crisis levels in the foreseeable future. [7] As a result, unemployment and other benefits will need to be paid for several years, and high levels of public investment might also have to be maintained.

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Government gross debt and primary fiscal balance in industrial economies1 (As a percentage of GDP)
Shaded areas represent forecast.
1 Weighted average based on 2005 GDP and PPP exchange rates of economies cited and data availability; Australia, Austria, Belgium, Canada, Denmark, France, Finland, Germany, Greece, Ireland, Italy, Japan, the Netherlands, New Zealand, Norway, Portugal, Spain, Sweden, Switzerland, the United Kingdom and the United States.
Sources: OECD; authors’ calculations.

The permanent loss of potential output caused by the crisis also means that government revenues may have to be permanently lower in many countries. Between 2007 and 2009, the ratio of government revenue to GDP fell by 2–4 percentage points in Ireland, Spain, the United States and the United Kingdom. It is difficult to know how much of this will be reversed as the recovery progresses. Experience tells us that the longer households and firms are unemployed and underemployed, as well as the longer they are cut off from credit markets, the bigger the shadow economy becomes. [8]

These concerns also need to be put into historical context. Many countries have a clear deficit bias. To see this, note in Graph 1 the relationship between public debt and two major indicators of the budgetary stance in advanced economies: the primary balance (the deficit excluding interest payments on the outstanding debt) and the structural primary balance (the primary balance adjusted for cyclical increases in expenditure and cyclical decreases in revenue). The graph shows that primary deficits in industrial countries have a life of their own, staying high or low for a number of years running. Such persistence is clearly evident in the 1970s and 1980s and again, to a lesser extent, in the early 2000s. To investigate this tendency, we perform a panel regression of the structural primary balance on its own lag, the lagged value of the debt/GDP ratio and the contemporaneous value of the output gap, using the past 30 years as a sample period. The estimates in Table 2 confirm that, on average, the structural primary balance is highly persistent and, furthermore, allow us to conclude that it responds positively to the lagged debt/GDP ratio. In particular, the short-term response of the structural primary balance to a 1 percentage point increase in the debt/GDP ratio is between 1 and 2 basis points. Taken at face value, these results imply a long-term response of approximately 6–9 basis points. [9] Furthermore, we find no evidence that fiscal authorities behave opportunistically, taking advantage of improvements in the output gap to tighten the stance of fiscal policy. Taken together, all this suggests to us that fiscal policy is likely to remain highly expansionary in the near term. In addition, if past behaviour is any guide to the future, fiscal authorities might find it difficult to adjust quickly – unless, that is, they are left with no choice.

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Structural primary balance regressed on a constant, lagged debt/GDP ratio, lagged structural primary balance and contemporaneous output gap1
*, ** and *** denote coefficients significantly different from zero at the 10%, 5% and 1% level, respectively.
1 Sample period is 1970–2008. Countries in the sample: Austria, Australia, Belgium, Canada, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Japan, the Netherlands, Norway, New Zealand, Portugal, Spain, Switzerland, Sweden, United Kingdom and the United States. 2 The panel regression has been estimated by OLS with White cross-section standard errors and fixed effects. 3 The panel regression has been estimated by GMM with White cross-section standard errors and fixed effects (using as the instruments regressors and lags of dependent variable (from –1 to –3). 4 The panel regression has been estimated by GMM with White cross-section standard errors (using as the instruments regressors and lags of dependent variable (from –1 to –3).
Sources: OECD; authors’ calculations.

Long-term fiscal imbalances

More worryingly, the current expansionary fiscal policy has coincided with rising, and largely unfunded, age-related spending (pension and health care costs). Driven by the countries’ demographic profiles, the ratio of old-age population to working-age population is projected to rise sharply. Interestingly, this rise is concentrated in countries such as Japan, Spain, Italy and Greece, which are already laden with relatively high debts (Graph 2, left-hand panel). Added to the effects of population ageing is the problem posed by rising per capita health care costs.

This leads us to the obvious conclusion that any assessment of the government fiscal situation based on a short-term perspective is incomplete and at best misleading. A key question is to what extent such accrued liabilities should be reflected in debt estimates. Concerns about both fiscal sustainability and intergenerational equity demand that the accumulated net discounted value of all future revenues and expenditure commitments scheduled in current laws be added to the current debt stock. Currently, however, there is no unique source providing such estimates. And uncertainty about future policy, demography and productivity growth raises issues about how this information should be presented and used (see eg Auerbach (2008) for a discussion).

That said, existing studies report that the magnitude of the long-term fiscal imbalance – the present value of unfunded liabilities arising from ageing – is very large. Hauner et al (2007) estimate the change in the primary balance required to equate the net present discounted value of all future revenues and non-interest expenditures to the debt levels prevailing at the end of 2005 for seven major industrial countries (Canada, France, Germany, Italy, Japan, the United Kingdom and the United States). The authors report that in order for these countries to pay off all their financial liabilities, they would require an average improvement in their budget balance excluding interest payments of 4.5% of GDP. For the United States and Japan, the estimate is 6.9% and 6.2%, respectively.

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Projected population structure and age-related spending
1 Working-age population is between 15 and 64 years of age. 2 In percentage points of GDP.
Sources: IMF, World Economic Outlook, April 2007; UN Secretariat; European Commission; Congressional Budget Office; authors’ calculations.

Other estimates are similar in magnitude. For example, Gokhale (2009) presents a measure of the long-term fiscal imbalance faced by 23 industrial countries. His estimates suggest that, for financing future benefits without future tax increases, the United States and major 6

European countries would be required to generate an annual present value surplus of the order of 8–10% of 2005 GDP over the period to 2050. The US Congressional Budget Office (CBO (2009)) provides official projections of long-term fiscal gaps associated with age-related spending. These suggest that the United States would need a permanent improvement in its budget balances of the order of 2.6% of 2009 GDP in the next 50 years and 3.2% in 75 years to stabilise the federal debt/GDP ratio at its 2009 level.

Because of the large uncertainties involved, we do not attempt to make our own projections of age-related liabilities, but instead rely on recent projections of age-related expenditure by the European Commission, the CBO and the IMF (Japan). The right-hand panel of Graph 2 reports the estimated incremental age-related outlays between 2011 and 2050. We note that these numbers suggest that the distribution of age-related spending is uneven across countries, with the burden considerably higher in Germany, Greece, Spain, the United Kingdom and the United States than in other countries. At the level projected, US health care expenditures as a percentage of GDP would double from about 5% today to 10% by 2035 and more than treble to 17% by 2080.

Interest rate and growth rate

The differential between the real interest rate and real output growth is a critical input parameter in determining the future evolution of public debt. When this differential is positive, so that the interest rate is greater than the growth rate, the debt ratio will explode in the absence of a sufficiently large primary surplus.

So far, the build-up of public debt in industrial countries has taken place against the backdrop of an exceedingly low interest rate environment. Despite low inflation, the real interest rate (in effective terms) at which governments are able to finance their deficits and roll over outstanding debt obligations has been falling since the late 1990s, reaching almost zero in some countries in the wake of the monetary policy response to the financial crisis (Graph 3, left-hand panel). However, as the graph reveals, the situation is changing quickly even without a change in monetary policy-controlled interest rates. Real borrowing rates rose through 2009, and are poised to continue increasing with the reversal of the current zero interest rate policy. Added to this is the fact that the crisis is likely to reduce the potential output growth rate for some time to come (Cecchetti and Zhu (2009)).

The right-hand panel of Graph 3 is indicative of the severity of the problems that governments face. It plots a measure of the difference between the real interest rate and real growth on the horizontal axis and the ratio of the primary surplus to total debt on the vertical axis. The higher the differential between the real interest rate and potential output growth, the larger the required structural primary surplus as a proportion of the previous-period debt level needed to maintain a stable debt/GDP ratio. Turning to the graph, for debt/GDP to remain stable, a country must be above the 45-degree line on the graph (which appears relatively flat due to the differences in the horizontal and vertical scale). The data show that the current fiscal policy is unsustainable in every country in the graph. Drastic improvements in the structural primary balance will be necessary to prevent debt ratios from exploding in future.

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Government borrowing and interest rate growth differentials
AU = Australia; AT = Austria; BE = Belgium; CH = Switzerland; DE = Germany; DK = Denmark, ES = Spain; FI = Finland; FR = France; GB = United Kingdom; GR = Greece; IE = Ireland; IT = Italy; JP = Japan; NL = Netherlands; NZ = New Zealand; PT = Portugal; SE = Sweden; US = United States.
1 Effective real interest rate on public debt computed from government gross interest payments at period (t) divided by government gross financial liabilities at period (t–1) minus inflation rate; in per cent. 2 Government primary balance at period (t) divided by government gross financial liabilities at period (t–1) in 2009; in per cent. 3 Effective real interest rate on public debt (average 1998–2007) minus OECD-estimated real potential GDP growth for 2012–17; in percentage points.
Sources: OECD; authors’ calculations.

3. The future public debt trajectory

We now turn to a set of 30-year projections for the path of the debt/GDP ratio in a dozen major industrial economies (Austria, France, Germany, Greece, Ireland, Italy, Japan, the Netherlands, Portugal, Spain, the United Kingdom and the United States). We choose a 30-year horizon with a view to capturing the large unfunded liabilities stemming from future age-related expenditure without making overly strong assumptions about the future path of fiscal policy (which is unlikely to be constant). In our baseline case, we assume that government total revenue and non-age-related primary spending remain a constant percentage of GDP at the 2011 level as projected by the OECD. Using the CBO and European Commission projections for age-related spending, we then proceed to generate a path for total primary government spending and the primary balance over the next 30 years. [10] Throughout the projection period, the real interest rate that determines the cost of funding is assumed to remain constant at its 1998–2007 average, and potential real GDP growth is set to the OECD-estimated post-crisis rate. [11]

Debt projections

From this exercise, we are able to come to a number of conclusions. First, in our baseline scenario, conventionally computed deficits will rise precipitously. Unless the stance of fiscal policy changes, or age-related spending is cut, by 2020 the primary deficit/GDP ratio will rise to 13% in Ireland; 8–10% in Japan, Spain, the United Kingdom and the United States; and 3–7% in Austria, Germany, Greece, the Netherlands and Portugal. Only in Italy do these policy settings keep the primary deficits relatively well contained – a consequence of the fact that the country entered the crisis with a nearly balanced budget and did not implement any real stimulus over the past several years.

But the main point of this exercise is the impact that this will have on debt. [12] The results plotted as the red line in Graph 4 show that, in the baseline scenario, debt/GDP ratios rise rapidly in the next decade, exceeding 300% of GDP in Japan; 200% in the United Kingdom; and 150% in Belgium, France, Ireland, Greece, Italy and the United States. And, as is clear from the slope of the line, without a change in policy, the path is unstable. This is confirmed by the projected interest rate paths, again in our baseline scenario. Graph 5 shows the fraction absorbed by interest payments in each of these countries. From around 5% today, these numbers rise to over 10% in all cases, and as high as 27% in the United Kingdom.

Seeing that the status quo is untenable, countries are embarking on fiscal consolidation plans. In the United States, the aim is to bring the total federal budget deficit down from 11% to 4% of GDP by 2015. In the United Kingdom, the consolidation plan envisages reducing budget deficits by 1.3 percentage points of GDP each year from 2010 to 2013 (see eg OECD (2009a)).

To examine the long-run implications of a gradual fiscal adjustment similar to the ones being proposed, we project the debt ratio assuming that the primary balance improves by 1 percentage point of GDP in each year for five years starting in 2012. The results are presented as the green line in Graph 4. Although such an adjustment path would slow the rate of debt accumulation compared with our baseline scenario, it would leave several major industrial economies with substantial debt ratios in the next decade. This suggests that consolidations along the lines currently being discussed will not be sufficient to ensure that debt levels remain within reasonable bounds over the next several decades.

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Public debt/GDP projections
Sources: OECD; authors’ projections.

An alternative to traditional spending cuts and revenue increases is to change the promises that are as yet unmet. Here, that means embarking on the politically treacherous task of cutting future age-related liabilities. With this possibility in mind, we construct a third scenario that combines gradual fiscal improvement with a freezing of age-related spending-to-GDP at the projected level for 2011. The blue line in Graph 4 shows the consequences of this draconian policy. Given its severity, the result is no surprise: what was a rising debt/GDP ratio reverses course and starts heading down in Austria, Germany and the Netherlands. In several others, the policy yields a significant slowdown in debt accumulation. Interestingly, in France, Ireland, the United Kingdom and the United States, even this policy is not sufficient to bring rising debt under control. [13]

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Projected interest payments as a fraction of GDP
Sources: OECD; authors’ projections.

All of this leads us to ask: what level of primary balance would be required to bring the debt/GDP ratio in each country back to its pre-crisis, 2007 level? Granted that countries which started with low levels of debt may never need to come back to this point, the question is an interesting one nevertheless. Table 3 presents the average primary surplus target required to bring debt ratios down to their 2007 levels over horizons of 5, 10 and 20 years. An aggressive adjustment path to achieve this objective within five years would mean generating an average annual primary surplus of 8–12% of GDP in the United States, Japan, the United Kingdom and Ireland, and 5–7% in a number of other countries. A preference for smoothing the adjustment over a longer horizon (say, 20 years) reduces the annual surplus target at the cost of leaving governments exposed to high debt ratios in the short to medium term.

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Average primary balance required to stabilise the public debt/GDP ratio at the 2007 level1
1 As a percentage of GDP. _ Sources: OECD; authors’ calculations.

Risks from fiscal imbalances

The future profile of public debt presents major risks and challenges for both fiscal and monetary policy. Here we focus on the real implications of living with a higher level of debt, and turn to challenges facing monetary authorities in the next section.

When a country starts from an already high level of public debt, the probability that a given shock will trigger unstable debt dynamics is higher. This risk is increased when public debt is already on a steep upward trajectory, as it is now in several countries. Knowing this, we would expect investors to demand a higher risk premium for holding the bonds issued by a highly indebted country. Studies of the impact of debt on risk premia are rather limited for advanced economies. What evidence there is suggests that the impact is relatively small. For each percentage point of additional public debt, researchers estimate a risk premium increase of between 1.2 and 1.6 basis points. [14]

With the advent of the market for credit default swaps (CDS), [15] we now have an additional source of information about investor attitudes towards highly indebted advanced economies. Data plotted in the top left-hand panel of Graph 6 allow the unsurprising conclusion that CDS spreads, and hence credit risk premia, are positively correlated with debt/GDP ratios. But we note that there is substantial heterogeneity, suggesting that other factors are important as well. For example, the higher the fraction of debt that is short-term, the lower the risk premium (Graph 6, lower left-hand panel). A higher ratio of incremental debt to private saving (lower right-hand panel) is associated with a higher risk premium. And risk premia are generally lower for countries with a high average revenue share in GDP (top right-hand panel). [16]

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Sovereign CDS spreads1 and fiscal indicators2
AU = Australia; AT = Austria; BE = Belgium; CA = Canada; CH = Switzerland; DE = Germany; DK = Denmark, ES = Spain; FI = Finland; FR = France; GB = United Kingdom; GR = Greece; IE = Ireland; IT = Italy; JP = Japan; NL = Netherlands; NO = Norway; NZ = New Zealand; PT = Portugal; SE = Sweden; US = United States.
1 Vertical axis: spread as of end of January 2010; in basis points. 2 Horizontal axis. 3 Forecast for 2011. 4 Domestic government debt with a remaining maturity of one to three years as a percentage of total domestic government debt. 5 Average change in general government debt as a percentage of average private savings; forecast average for the period 2009–11.
Sources: IMF, World Economic Outlook; OECD; JPMorgan Chase; Markit.

In addition to higher risk premia and increased cost, a second risk associated with high levels of public debt comes from potentially lower long-term growth. A higher level of public debt implies that a larger share of society’s resources is permanently being spent servicing the debt. This means that a government intent on maintaining a given level of public services and transfers must raise taxes as debt increases. Taxes distort resource allocation, and can lead to lower levels of growth. Given the level of taxes in some countries, one has to wonder if further increases will actually raise revenue. [17]

The distortionary impact of taxes is normally further compounded by the crowding-out of productive private capital. In a closed economy, a higher level of public debt will eventually absorb a larger share of national wealth, pushing up real interest rates and causing an offsetting fall in the stock of private capital. [18] This not only lowers the level of output but, since new capital is invariably more productive than old capital, a reduced rate of capital accumulation can also lead to a persistent slowdown in the rate of economic growth. In an open economy, international financial markets can moderate these effects so long as investors remain confident in a country’s ability to repay. But, even when private capital is not crowded out, larger borrowing from abroad means that domestic income is reduced by interest paid to foreigners, increasing the gap between GDP and GNP.

Last but not least, the existence of a higher level of public debt is likely to reduce both the size and the effectiveness of any future fiscal response to an adverse shock. Since policy cannot play its stabilising role, a more indebted economy will be more volatile. This was evident during the latest crisis. Countries saddled with very high levels of public debt did not expand fiscal policy as much as other countries. And, although these countries benefited somewhat from the effects of foreign fiscal expansion, a larger domestic fiscal stimulus could have helped to reduce the severity of the recession actually experienced.

4. The challenge for central banks

Steeply rising public debt levels and the uncertainty associated with future fiscal consolidation plans pose at least two important challenges for monetary policymakers. First, deteriorating public finances can trigger a sudden increase in long-term inflation expectations. Second, uncertainty about the timing and extent of fiscal consolidation plans complicates the forecasting needed to set policy interest rates at their appropriate level. In the following, we focus on the inflation risks.

Is there currently a risk that inflation expectations may rise? And what can monetary policymakers do to reduce this risk? To answer these questions, it is helpful to review the mechanisms by which persistently high fiscal deficits could lead to inflation. [19]

A first mechanism stresses the ultimate impossibility of continuing to roll over ever increasing levels of public debt when monetary and fiscal authorities are pursuing inconsistent objectives. When the public reaches its limit and is no longer willing to hold public debt, the government would have to resort to monetisation. The result, consistent with the quantity theory of money, is inflation. And anticipation that this will happen may also lead to an increase in inflation today as investors reassess the risk from holding money and government bonds. In such an environment, fighting rising inflation by tightening monetary policy would not work, as an increase in interest rates would lead to higher interest payments on public debt, leading to higher debt, bringing the likely time of monetisation even closer. [20]

Thus, in the absence of fiscal tightening, monetary policy may ultimately become impotent to control inflation, regardless of the fighting credentials of the central bank. [21]

Conflicts between the goals of fiscal and monetary authorities can explain a number of inflationary outbursts in emerging market economies. Notable examples of this are: the Brazilian inflationary boom in the early 1980s when monetary policy, in the face of persistent fiscal deficits, started to act more aggressively against inflation (Loyo (1999)); the large jump in Israeli inflation in October 1983 (Sargent and Zeira (2008)); and the Indian inflation of the 1970s and 1980s in which fiscal deficits were monetised (Rangarajan and Mohanty (1997)).

A second mechanism by which public debt can lead to inflation focuses on the political and economic pressures that a monetary policymaker may face to inflate away the real value of debt. The payoff to doing this rises the bigger the debt, the longer its average maturity, the larger the fraction denominated in domestic currency, and the bigger the fraction held by foreigners. Moreover, the incentives to tolerate temporarily high inflation rise if the tax and transfer system is mainly based on nominal cash flows and if policymakers see a social benefit to helping households and firms to reduce their leverage in real terms. It is, however, worth emphasising that the costs of creating an unexpected inflation would almost surely be very high in the form of permanently high future real interest rates (and any other distortions caused by persistently higher inflation). [22]

While discussions of inflation risks in the financial press abound, there is little evidence that fiscal prospects are materially affecting inflation expectations. While US and euro area market-based inflation expectations became volatile immediately before and after the recent financial crisis, Graph 7 shows that they have reverted to the average levels of the past five years or so. Meanwhile, survey-based measures of inflation expectations in both areas have been more stable than market-based ones.

Although the chance of a government being forced or tempted to tolerate higher inflation is rather remote in the short run, the chance that it could do so in the future is not insignificant. [23] Therefore, the risk that long-term inflation expectations could suddenly become unanchored today is a possibility that should not be discounted. The most likely manifestation of this risk is an unexpected and abrupt rise in government bond yields at medium and long maturities as negative news about the state of the economy and public finances leads investors to reassess the risks of fiscal unsustain

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Inflation expectations (In per cent)
1 For Survey of Professional Forecasters (SPF); euro area, five-year-ahead.
Sources: ECB, Survey of Professional Forecasters; Federal Reserve Bank of Philadelphia, Survey of Professional Forecasters; © Consensus Economics; national data; authors’ calculations.

5. Conclusion

Our examination of the future of public debt leads us to several important conclusions. First, fiscal problems confronting industrial economies are bigger than suggested by official debt figures that show the implications of the financial crisis and recession for fiscal balances. As frightening as it is to consider public debt increasing to more than 100% of GDP, an even greater danger arises from a rapidly ageing population. The related unfunded liabilities are large and growing, and should be a central part of today’s long-term fiscal planning.

It is essential that governments not be lulled into complacency by the ease with which they have financed their deficits thus far. In the aftermath of the financial crisis, the path of future output is likely to be permanently below where we thought it would be just several years ago. As a result, government revenues will be lower and expenditures higher, making consolidation even more difficult. But, unless action is taken to place fiscal policy on a sustainable footing, these costs could easily rise sharply and suddenly.

Second, large public debts have significant financial and real consequences. The recent sharp rise in risk premia on long-term bonds issued by several industrial countries suggests that markets no longer consider sovereign debt low-risk. The limited evidence we have suggests default risk premia move up with debt levels and down with the revenue share of GDP as well as the availability of private saving. Countries with a relatively weak fiscal system and a high degree of dependence on foreign investors to finance their deficits generally face larger spreads on their debts. This market differentiation is a positive feature of the financial system, but it could force governments with weak fiscal systems to return to fiscal rectitude sooner than they might like or hope.

Third, we note the risk that persistently high levels of public debt will drive down capital accumulation, productivity growth and long-term potential growth. Although we do not provide direct evidence of this, a recent study suggests that there may be non-linear effects of public debt on growth, with adverse output effects tending to rise as the debt/GDP ratio approaches the 100% limit (Reinhart and Rogoff (2009b)).

Finally, looming long-term fiscal imbalances pose significant risk to the prospects for future monetary stability. We describe two channels through which unstable debt dynamics could lead to higher inflation: direct debt monetisation, and the temptation to reduce the real value of government debt through higher inflation. Given the current institutional setting of monetary policy, both risks are clearly limited, at least for now.

How to tackle these fiscal dangers without seriously jeopardising the incipient recovery is the key challenge facing policymakers today. Although we do not offer advice on how to go about this, we believe that any fiscal consolidation plan should include credible measures to reduce future unfunded liabilities. Announcements of changes in these programmes would allow authorities to wait until the recovery from the crisis is assured before reducing discretionary spending and improving the short-term fiscal position. An important aspect of measures to tackle future liabilities is that any potential adverse impact on today’s saving behaviour be minimised. From this point of view, a decision to raise the retirement age appears a better measure than a future cut in benefits or an increase in taxes. Indeed, it may even lead to an increase in consumption (see eg Barrell et al (2009) for an analysis applied to the United Kingdom).


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Pentagon Invents Taliban Atrocity in Khataba

Pentagon Invents Taliban Atrocity in Khataba

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U.S. Special Operations Command cover-ups turn Afghans against U.S. military and toward Taliban
It was early morning on February 12, 2010, in the village of Khataba near the city of Gardez in Paktiya Province, Afghanistan. A local family was celebrating the birth of a child. Suddenly, gunfire erupted from a nearby rooftop striking two men, two pregnant women, their unborn children and an 18-year old girl. The two men appear to have been killed instantly. The women were injured and reported bled to death because the gunmen would not allow them to be taken to a local hospital. Other family members were forced out of the home and detained. The gunman turned out to be American special operations troops.

Realizing that they had killed seven innocent people, the Americans immediately began to create what would become a series of false stories and fabricated incidents. They would destroy evidence of this potential war crime and ultimately attempt to blame the killings on the Taliban. The killings might well have been accidental, but the cover-up was premeditated, intentional and criminal. It causes one to wonder what other alleged Taliban and al-Qaeda “atrocities” have been manufactured by the Pentagon, and how many other Afghan civilians have been killed by the American military, with the Taliban being falsely blamed. The credibility of the American military is at stake in this case.

This article seeks to unravel the facts. It sets out some of the lies and fabrications, and attempts to identify some of those responsible. This incident may merit the United Nations Security Council appointing a special prosecutor as it did in the case of the murder of Lebanese Prime Minister Rafiq Harari.

At approximately 4 a.m. on February 12, 2010, noises outside the compound of Hajji Sharaf Udin, prompting his son, the Zurmat District police chief (Mohammed Daoud) and his brother (Mohammed Saranwal Zahir), the provincial district attorney, to open the door of the compound to investigate. When the police chief saw that one of the exterior lights was out, he walked into the family courtyard where he was shot and killed. His assailant apparently was on a nearby rooftop. The police chief’s brother rushed to his rescue, along with three unarmed women.

One sniper shot them all. Two of the women (Saleha and Shirin) were pregnant and the third (Gulalai) was an 18 year old teenager. The women collectively were the mothers of 16 children.
The other occupants of the home were forced outside by gunpoint and interrogated. American forces sealed off the compound until approximately 11 a.m. (seven and a half hours later). After that, Afghan government officials were permitted to enter the compound. One eyewitness reported that the Americans were not wearing military uniforms. If true, such conduct would violate the rules of war.

Later that day, the International Security Assistance Force (ISAF), in Kabul, issued a news release. We reprint it in its entirety:

“Joint Force Operating in Gardez Makes Gruesome Discovery.” “An Afghan-international security force found the bound and gagged bodies of three women during an operation in Gardez district, Paktiya Province last night. The joint force went to the compound near the village of Khatabeh, after intelligence confirmed militant activity. Several insurgents engaged the joint force in a fire fight and were killed.

Subsequently, a large number of men and women and children exited the compound and were detailed by the joint force. When the joint force entered the compound, they conducted a thorough search of the area and found the bodies of three women who had been tied up, gagged and killed. The bodies had been hidden in an adjacent room. The joint force immediately secured the area and requested expert medical support and will conduct a joint forensic investigation. Eight men were detained for further questioning.”

ISAF officials then briefed the news media and expanded on the news release. They stated that two “insurgents” had “engaged” (i.e., fired on) ISAF forces and had been killed. They stated that troops then discovered three women inside the compound. The women had been dead for a number of hours, they were stabbed and were discovered bound and gagged. ISAF officials initially implied that the women had been the subject of an “honor killing” by their relatives. Other officials later suggested that the women had been killed by the “insurgents” occupying the compound. As The Times (of London) reported on April 13, 2010, ISAF was clearly attempting to blame the killings on the Taliban.

On March 13, 2010, ISAF spokesperson U.S. Navy Captain Jane Campbell issued a second news release entitled: “ISAF Rejects Cover-up Allegation.” Captain Campbell repeated the initial story about the American soldiers discovering the bodies of three women. The story about the women being “bound, gagged and killed” was slightly modified. Captain Campbell now explained that “The women’s feet had been tied, and they had cloth straps that immobilized their jaws, evidently in preparation for burial.” This of course was not true as the Special Operations troops had shot and killed them.

On April 4, 2010, ISAF issued another news release, this one apparently drafted by Canadian Brigadier General Eric Tremblay. After two months, ISAF finally admitted the following:
  • Its forces had killed two innocent men and three women, and
  • There had been no fire fight.
General Tremblay made no mention of the unborn children that the Americans had killed. Tremblay stated the statements about the women being bound and gagged and killed was “due to a lack of cultural understanding.” [this of course is nonsense] Tremblay concluded by stating:

“While investigators could not conclusively determine how or when the women died, due to a lack of forensic evidence, they concluded that the women were accidentally killed as a result of the joint force firing at the men.”

Any lack of forensic evidence was solely the result of the military’s refusal to collect such evidence. It had absolute control of the crime scene for more than seven hours. On April 4, 2010, ISAF spokesperson Lieutenant-Colonel Todd Breasseale, insisted to the Kabul news media that there had been no cover-up and that there was no evidence of any inappropriate conduct by any military personnel. He stated that the troops were acting on intelligence information from a reliable source.

Mohammed Tahir, the father of the 18 year Gulalai, told investigators that he witnessed American troops taking photographs and he saw one soldier with a knife trying to extract the bullets from his daughter’s body. Other witnesses present included Sayyid Mohammad Mal, who is the Vice-Chancellor of Gardez University. His son was engaged to Gulalai.

ISAF officials revealed that the troops involved were American special operations forces and that they were not under ISAF command. It appears that the troops were either from Delta force, or more likely from Navy Seal Team 6. They were operating in Afghanistan under the immediate authority of Vice Admiral William McRaven, Commander of the Joint Special Operations Command. Ultimately the troops were under the command of Admiral Eric Thor Olson, the head of U.S. Special Operations Command, MacDill Air Force Base. Admiral Olson remains sequestered in his Tampa, Florida headquarters. He needs to show some leadership and integrity and hold a press conference. At that conference, Admiral Olson should:
  • Explain what occurred;
  • Provide details as to the orders that were issued to the troops;
  • Address each of the false statements;
  • Release the complete military report on the killings;
  • Identify those responsible for the killings and the false statements;
  • Explain why none of these military officials are being prosecuted; and
  • Provide information on the informant that provided the “intelligence” and what action has been taken against the informant.
There are seven issues here.

First: Were these killings an accident or were the killings so reckless and unnecessary so as to constitute seven murders?

Second: Why has it taken two months for the American military to admit that its troops killed the civilians in Khataba? The investigation should have taken hours - not months. Why will the military not admit to killing the two children?

Third: Regardless of whether the killings were accidental or reckless, the evidence is overwhelming that there was a cover-up. Admiral Olson needs to detail who was involved in this and who knew about it. No official who had any knowledge or complicity in any of the false statements deserves to still be in either ISAF or the U.S. military.

Fourth: What steps have been taken to prevent a recurance of this scandal? The public deserves more than a vague statement that ISAF will try to do better in the future.

Fifth: Why will the Pentagon not admit that, after nine years of warfare, it is still launching raids based on faulty intelligence? What is it doing to sanction or prosecute informants who deceive the military into attacking innocent civilians?

Sixth: Why is there silence from the American Embassy in Kabul. U.S. Ambassador Karl Eikenberry’s refusal to speak out regarding this scandal should destroy whatever credibility he has left.
Seventh: What is the impact of this scandal?


The killings and the cover-up, and the refusal to prosecute those responsible, may fuel the insurgency. On March 26, 2010, The New York Times published an article by Richard A. Oppel. Based on interviews with ISAF officials at Bagram prison, The New York Times was able to confirm that most of the Taliban prisoners in American custody had joined the Taliban to avenge the arbitrary arrests, prison abuses, killings, bombings and other outrages that have been carried out by American and ISAF forces.

By all accounts the Taliban was militarily and politically defeated by December 2001. What The New York Times article reveals is that American military heavy-handedness and blunders are largely responsible for reviving the Taliban and turning it into the 30,000+ army that it is today.

The irony is that the Pentagon, in 2001, established rules of engagement for its forces in Afghanistan which essentially permitted soldiers to kill anyone who they subjectively believed might be a threat. Those rules were designed to reduce American casualties. In actuality, those rules sanctioned the killing of an excessive number of noncombatants, which began a cycle of revenge which has continued for nine years. These rules of engagement may have ultimately increased American casualties and may jeopardize the withdrawal of American forces. Despite the growing evidence that its rules of engagement are escalating the war, the Pentagon has refused to modify them. The Pentagon still does not understand that excessive killing begets more killing. More killings only increase American casualties.

Prior to the Fall of 2001, the Taliban was a reclusive army of religious extremists. Today, they are a savvy, multinational insurgency, with broader support because their umbrella now includes nationalistic and anti-foreign forces elements, along with those seeking revenge for ISAF and American abuses, killings and secret prisons.

If history is any judge, the Khataba killings and their cover-up may have pushed family members, relatives, tribal members and others into the ranks of the Taliban. The impact on the battlefield from this scandal may continue to be felt for years.


The second impact is that ISAF and the Americans may find themselves with zero credibility in the future. This is not an instance where there was an exaggeration, or spin or a false statement or two. This is not the tale of a few bad apples. What occurred in the aftermath of these seven killings was a carefully orchestrated cover-up. The level of detail and the number of military officials who would have to be involved, is evidence of a systemic effort to blame the Taliban and others for civilian killings carried out by American special operations troops.

The refusal to appoint a general or flag rank criminal investigating officer exposes the high level of official support for this criminal conspiracy. The impact is nothing less than the loss of the moral high ground to the Taliban and al-Qaeda. If the American military can kill civilians and try to place the blame on others, then they have only themselves to blame if future statements of theirs are characterized as lacking in credibility. Incidents such as these aid the enemy and can change the course of a war.

It is not too late to fix this. General Stanley McChrystal should begin by firing General Tremblay, Captain Campbell and Lieutenant Colonel Breasseale and sending them home. Next he should release the full military report on the incident and third, he should appoint a four-star General or Admiral as, what the U.S. military calls, an “Article 32 Investigating Officer.” The criminal investigation should encompass the killings and the cover-up by ISAF and U.S. Special Operations Command. All these actions should be transparent and expeditious.

For more information go to: - “U.S. forces’ horrifying Afghanistan coverup” by John Kepka. - “Man loses 5 family members in disputed NATO raid” by CNN correspondents Atia Abawi and Muhib Habibi. - “Bodies found gagged, bound after Afghan “honor killing.” - US special forces tried to cover-up botched Khataba raid in Afghanistan” by Jerome Starkey. - “Afghan Investigators Say U.S. Troops Tried to Cover-Up Evidence in Botched Raid” by Richard Oppel and Abdul Waheed Wafa.

If Not Us, Then Who?

If Not Us, Then Who?

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Some psychologists say that abuse, whether physical, emotional or sexual, tends to leave a mark on those that were abused, sometimes causing the abused to become abusers. I tend to think that this tendency can also be carried on to groups of people, even entire nations.

In the last century, one good example of abuse that left the victims to become abusers is the former USSR. The government and the media, especially during the last century glossed over the fact that an estimated 20-25 million Soviets, military and civilian were killed in the Second World War by their enemies and by Stalin’s purges. We almost completely forget that other nation’s that belonged to the Axis powers by choice, such as Romania, Bulgaria, many Ukrainians and other Eastern European nations that believed in Hitler and had their own Nazi apparatus. They contributed to Germany’s war effort by providing their own divisions of soldiers and their resources against the USSR, therefore it was not surprising that the Soviets kept a firm boot heel on these nations during the Cold War. I dare say that the reprisals could have been much worse, but whether it was pragmatism or the recent slaughter of so many people during the war which was the prime factor for restraint is open to speculation. Either way, the situation could have been much worse.

The Jewish people also suffered under the Nazi’s. This may have been a factor in the way they violently removed the Palestinians from their homeland and the many senseless killings that contributed to the formation of the Jewish State. The question I have is that 65 years after the end of WWII, why does the carnage against the Palestinian people persist? How long does it take for a people to realize that violence begets violence? The sad truth is that it wasn’t the people of Palestine that committed the atrocities against the Jews, but the Nazi’s.

Israel has become its own worst enemy. The very thing that they cite as an example of man’s inhumanity to man, the Holocaust, has been replaced by the wanton violence against a people that lived side by side with the Jews since antiquity. DNA studies have proven that the Jews and the Palestinians share the same bloodline; they are closer to the Palestinians than they are to the Eastern European Jews that migrated to Israel after the war. Why the insatiable bloodlust they display toward the people of Palestine? When will the carnage stop? From the decimation of the Palestinian refugee camps in Lebanon, led by Ariel Sharon on the Israeli side and the Lebanese Christian Militias, upwards of 2,500 men women and children of these squalid camps were mercilessly slaughtered in 1983 while the world did and said nothing. The recent “Operation Cast Lead”, the brutal assault on the Gaza Strip by the Israeli Defense forces using white phosphorus and napalm and cluster munitions supplied by the United States was an act of abject horror.

The Goldstone Commission led by a South African Jew, stated categorically that many war crimes were committed on a basically defenseless population with a median age of 14 by a professional military with the most modern military aircraft and armor that money can buy, most of it supplied or given by the United States of America, used against a people that have never lifted a finger against our people. The rest of the world also contributed to the Israeli atrocities by remaining silent after it was over. The United Nations Secretary Ban Ki-Moon delivered a speech to the world from Gaza as white phosphorus munitions lay smoldering behind him, in the middle of a UN Relief Compound.

We castigate Neville Chamberlin for desiring “Peace in our time” as he enabled Nazi Germany to swallow Czechoslovakia without a fight. We ask members of NATO to join the United States against a ragtag group of Taliban in Afghanistan and tell them that it is their “moral duty” to support us in this war for a petroleum pipeline through the country. We called Iraq a rogue nation and invaded it under the guise of removing “weapons of mass destruction” that the UN inspectors insisted that Saddam never had. After we defeated their gutted military that was decimated through years of sanctions and air attacks, we disbanded their government, police forces, fire departments and municipal maintenance units on the pretext of de-Baathification and left the Iraqi people without any government services, electricity and a bombed out infrastructure and wondered why most of the population became “insurgents”.

We have used nuclear weapons in three areas of the world, the former Yugoslavia, Iraq and Afghanistan and call these weapons “depleted uranium”. Meanwhile, the rods inside these munitions work so efficiently is because they produce an atomic reaction when used against armor, turning white-hot and slipping through armor like a hot knife through butter, vaporizing into particles smaller than a micron and having a nuclear half-life of over 400,000 years. This radioactive dust gets into the soil, the air, the water. It is ingested by humans and animals. Radioactivity in the atmosphere has been detected over Northern Europe. Parents in Iraq, after the birth of a child no longer ask if the child is a boy or a girl. They ask if it’s “normal”. Birth defects are up 400 percent in Iraq. Babies are born without heads or their eyes missing or their nose in the middle of their foreheads. Yet the media says nothing and our government denies everything. Soldiers returning from Iraq, transfer this radioactive poison to their wives through their sperm. There is a rash of incidents where babies are born to service members that appear to be normal, but after eight months or so the infant’s heart explodes because the heart muscle is too thin. Veterans develop bone degeneration, cancers and other side effects of radiation, depending on the amount of radioactive particles ingested. The government denies this also.

If abuse creates abusers, then when were Americans “abused”? To this writer, I just don’t see it. It seems that we have never suffered to the extent the Russian people and the Jewish people suffered. What is our excuse? Is the mission of “bringing democracy to the world” that so many government officials claim worth killing innocent civilians that have never attacked us? The perpetrators of 9/11 according to our own government (if you believe the “official” story) were mostly Saudi Arabian, yet that nation is the second largest recipient of military aid behind Israel. Why do we have military bases in over 90 countries? Why do we need 800 military bases? Why are we spending 47% of the world’s military expenditures? Why isn’t the media screaming about this?

In fact, why do I feel like I have to write about all of this? If this were 20 or 30 years ago, it would be on the front pages of the New York Times and Washington Post. The TV news media would be talking these facts to death. Senators would be demanding investigations. The uproar would have been deafening. The truth is that the media is an agent of the corporate world and the corporate world controls the government. These military expenditures are great for GE and Westinghouse, giant media conglomerates besides being large defense contractors. It all works hand in glove. The days of the independent journalist on a major media outlet are gone. What you read on the internet (including this piece) is as close to the truth as you will get.

People decry the cost of the recent healthcare bill, yet we are spending about 1.5 trillion dollars this year on the military. Where are our priorities? Where is the logic in this?

Nothing I’ve written here is something I haven’t written about before. I could go on. In fact I have written one book with two more on the way on exactly what I’m writing about today. Maybe I am boring some people, but I feel that what I’m writing about must be said again and again. This is not what I would have wished for my country. I feel responsible. The only way I know to fight against what is happening is to write about it, if I have to, again and again and again. We have so many problems that challenge us that need to be addressed. Issues such as Peak oil, the vanishing Middle-Class, our crumbling infrastructure, the corruption of our financial industry and the outsourcing of American industry to name but a few.

Sorry if I bored you with this. If I piqued your interest I succeeded. If I made you angry, check out the facts and write to me, you may find out, unfortunately for you, it is all true. To those that know all about what I’ve written here, keep telling others. If not us, then who will speak the truth?