A License to Print Money 3

A little while back I expressed disappointment that Paul Krugman seemed to hold back from an obvious conclusion that printing money was the sensible course of action given the current economic predicament (weak overall demand, high private debt levels).

So it is good to see that he stuck his nose out a little further on this topic while I was away.

Says Krugman,

"In the end, I’d argue, what must happen is an effective default on a significant part of debt, one way or another. The default could be implicit, via a period of moderate inflation that reduces the real burden of debt; that’s how World War II cured the depression. Or, if not, we could see a gradual, painful process of individual defaults and bankruptcies, which ends up reducing overall debt."

It's also reassuring to see that, since I wrote this post summarizing my thoughts on the economic situation in mid-2009, the views of notable economists I respect (such as Paul Krugman) seem to be coming around much more to the view I articulated at that time - in particular that we either need to inflate or default in order to reset our debt to a much lower level. Or maybe they knew this all along and are just now becoming willing to spell it out clearly - either way, it seems like progress to me.

Good News / Bad News

Paul Kedrosky links to a McKinsey report that contains some information I've been looking for for a while now.

In particular, this chart, showing total debt as a percentage of GDP for Canada (click to enlarge).



The good news is that of all the countries shown, the total debt/gdp ratio in Canada is the lowest. The bad news is that the line on the chart for Canada is going almost straight up and that when the folks at McKinsey started factoring in more qualitative factors to assess risk levels, they came up with the following chart...



... which echoes concerns recently expressed by the Bank of Canada about household debt in Canada.

Anyway, it's nice to finally have at least an estimate of the path of total debt/gsp in Canada.

Media Illiteracy

From the Globe and Mail:

"Seven of the members of the Group of 20 nations are on a trajectory that will leave them with debts bigger than 75 per cent of their economies by 2014" ... "Even in Canada, a relative paragon of fiscal prudence, the combined gross debt of the federal and provincial governments is on pace to reach 79 per cent of gross domestic product next year"

So here's 3 statements in those 2 paragraphs:
1) 7 out of the G20 nations will have a public debt/GDP ratio above 75% by 2014.
2) Canada's ratio will be at 79% next year.
3) Canada is a relative paragon of fiscal prudence.

OK then.

Since I'm posting, I have to say I find it somewhat mystifying how much more attention high levels of public debt get vs. high levels of private debt. I understand there being some more focus on the public debt, but the ratio seems way out of proportion - especially given events of the last few years.