Host Gene Tunny discusses the US debt ceiling and the emerging economies debt crisis with his Adept Economics colleague Arturo Espinoza. Gene shares a memory of his own experience with the debt ceiling the Australian Government had at the time of the 2008 global financial crisis (GFC).
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You can listen to the episode via the embedded player below or via podcasting apps including Google Podcasts, Apple Podcasts, Spotify, and Stitcher.
What’s covered in EP190
- [04:35] US debt ceiling negotiations.
- [09:18] US hitting its debt ceiling.
- [14:51] The trillion-dollar coin as a possible workaround.
- [16:14] Spending and revenue challenges.
- [26:05] Australian debt ceiling legislation in 2008-09.
- [29:05] US debt limit and consequences.
- [33:25] Argentina’s economic struggles.
- [40:02] IMF’s Nightmarish Identity Crisis & emerging economies debt crisis.
- [42:27] China’s role in emerging markets debt.
- [45:13] PNG and China.
Links relevant to the conversation
Links relevant to the conversation
Noah Smith’s Subtack post:
Treasury to take ‘extraordinary measures’ as US hits debt ceiling | Financial Times
Michael Knox’s note on the debt ceiling:
AUS_ESQ_230523_US government shutdowns and why US treasuries never default.pdf
https://www.whitehouse.gov/cea/written-materials/2023/05/03/debt-ceiling-scenarios/
Federal Spending | U.S. Treasury Fiscal Data
The IMF faces a nightmarish identity crisis
How China changed the game for countries in default | Financial Times
There Is No Chinese ‘Debt Trap’ – The Atlantic
Argentina raises interest rate to 97% as it struggles to tackle inflation | CNN Business
Argentina inflation smashes past every forecast to hit 109% | Reuters
Transcript:
US debt ceiling & Gene’s Aussie debt ceiling experience in the GFC | Emerging economies debt crisis – EP190
N.B. This is a lightly edited version of a transcript originally created using the AI application otter.ai. It may not be 100 percent accurate, but should be pretty close. If you’d like to quote from it, please check the quoted segment in the recording.
Gene Tunny 00:06
Welcome to the Economics Explored podcast, a frank and fearless exploration of important economic issues. I’m your host Gene Tunny. I’m a professional economist and former Australian Treasury official. The aim of this show is to help you better understand the big economic issues affecting all our lives. We do this by considering the theory evidence and by hearing a wide range of views. I’m delighted that you can join me for this episode, please check out the show notes for relevant information. Now on to the show. Hello, thanks for tuning in to the show. In this episode, I chat with my adept economics colleague Arturo Espinosa about the US debt ceiling in the emerging economies debt crisis. We recorded this episode last week on Thursday the 25th of May. A few days before we learned the White House and the Republican leadership have agreed to a deal to avert the US government from running out of money and having to choose between paying bondholders or Social Security recipients. So please keep that in mind when listening to this episode. I thought the Republicans would hold out longer than they did and I was surprised they reached this agreement over the weekend, particularly given the new estimate of when the government will run out of money is June the fifth. That is Monday next week. They may have been worried about how the financial markets might react if an agreement wasn’t breached. And they wanted to avoid suffering politically for any market falls. Also, House Speaker Kevin McCarthy probably figured he needed to reach agreement with the White House over the weekend. So we could get the debt ceiling lifted by Congress this week. Apparently things can still go wrong, as the debt ceiling does need to be lifted by Congress. And it’s up to Speaker McCarthy to ensure his deal is backed by his Republican colleagues. From what I can tell the agreement between the White House and the Republican leaders doesn’t go far enough to fix the structural problems with the US deficit, which I’ve talked about on the show before. Prominent substack analysis Smith is written a manufactured crisis leads to an ineffectual solution. I’ll link to his post in the show notes because it contains a good summary of what the deal covers, including a freeze on discretionary spending in 2020 for 1% growth in 2025. And this will amount to a significant real cut in discretionary spending given inflation. However, as Arturo and I discussed in our conversation, the problem with the US budget is that a large part of it is non discretionary. Around two thirds of it is mandatory as a result of legislation and regulations defining eligibility for different government benefits. That’s an issue for budgets around the world. I should note of course, and we have a similar issue here in Australia. The point I’m making is that it’s very difficult to actually fix these budgetary problems without getting stuck into some major welfare programmes that that can be quite popular. So the Republicans got some concessions from the White House such as a spending freeze and expanded work requirements for food stamps. But I expect the US government will still have a sizable budget deficit and it will keep on accumulating debt. Again, the can has been kicked down the road, as they say. However, at least we may have avoided what could have been a new economic crisis for now. I’d be interested in your thoughts on the US debt ceiling? Do you think having a ceiling is good or bad? How can the US get its budget repaired? You can email me via contact and economics explored. I’d love to hear from you. As always check out the shownotes relevant links and information. I’m recording this introduction around 24 hours before this episode gets published. Anything major happens between now and then I’ll mention it in the show notes. Right oh, now on to the show. Thanks for tuning into the show. In this episode, I’m going to have a conversation about some topical global macro economic issues with my colleague at adapt economics. Arturo Espinosa, Arturo, thanks for joining me again on the programme. Hey, now happy to be here. Excellent. Out here. I thought given all of the the news around the US debt ceiling and the it’s unclear what these negotiations will bring that there’s a possibility the US Treasury could run out of money on the the first of June, according to Janet Yellen. So in early June, there are other estimates of when that will occur. But there’s a general view that things are going to be very difficult for the US Treasury in well next month. So yeah, we’re really at the The point in the negotiations was something has to happen, or else we’re going to have a real serious problem, aren’t we? So I thought we could have a chat about the US debt crisis first, then we might talk about the developing economy, debt crisis. And then if we get time, we might touch on what’s been happening in in Argentina with inflation and interest rates. There’s some big news coming out of there. So does that sound like a good approach? Good thing? Good agenda?
Arturo Espinoza Bocangel 05:29
Yes. It sounds interesting.
Gene Tunny 05:32
Very good. So when we’re talking about the US debt ceiling? Well, given we’re talking about I should know that we’re recording this on the On Thursday, the 25th of May. Now when this episode comes out, the week after, who knows? I mean, something could have happened, there could have been some development. I mean, I’m expecting they’ll just go right down to the wire, though. The Republicans, they will just hold out as long as they can. Before they agree to some package or some they make some compromise with the White House, with Biden and with the Democrats. Just because it’s politically advantageous for them to do this. And so there’s politics involved. And it’s very difficult to, to see how that how this, how this will play out. My view is that we won’t have the US government defaulting, there may be some sort of shut down for a few days, a week, a couple of weeks. The US government has shut down in the past. I mean, it’s shut down some agencies that shut down some national monuments you couldn’t get in to see them. And there were public servants that were temporarily laid off. But generally the US government does meet its its obligations to bondholders. It hasn’t defaulted. In fact, there’s a clause in the amendment to the Constitution that says it has to respect the the I think the executive has to respect the full faith and credit of the US or make sure that that is implemented. Was it the 14th Amendment, I’ll put it in the show notes. But I think it’d be it’d be such an extraordinary situation to see. This era, the US government effectively run out of money, and then not have to pay bondholders. And this is, this is something that Michael Knox has written about in a really good note that I’ll link to in the show notes, where Michael writes that he’s written this note US government shutdowns and why US Treasuries never default. And what Michael’s written so Michael is Chief Economist at Morgan’s here, a major financial advisory firm in Brisbane here. So they, while a stock broking, they do stock broking wealth management. He said in practical terms, the first right of payment for US Treasury bonds continues when the government shuts down us taxation revenue is used to pay the money owed on US Treasury bonds first, and US government employees second, this system has continued from 7091 until this day, this is why US Treasury bonds never default. So, Michaels fairly optimistic about how this plays out. Michael’s a keen observer of, of what’s happening in the States. And I think he’s someone that I respect a lot. So let’s hope he’s, he’s right there. Because I mean, it clearly would be a really extraordinary thing if the US Treasury couldn’t pay or couldn’t meet its debt re payments or couldn’t pay the interest on Treasury bonds, it would be extraordinary. And this is all come about because they have a limit, a legislated limit on how much the national debt can be what the total amount of bonds on issue can be. And that was around I think it’s around 31 trillion. I had that. I’ve got that in the notes somewhere. I’ll put it in the show notes. And they basically hit that limit earlier this year. So around around January, so January 19, the US hit its debt ceiling of $31.4 trillion. And since then, what they’ve been doing, they’ve been taken what Janet Yellen, the Treasury Secretary has called extraordinary measures. So they’ve been not making certain payments that they would into trust funds and so forth. I think retirement benefits for public servants have I remember correctly. So there are certain things that they’ve they’ve been doing to delay the the inevitable when you you run out of money. This is a sort of thing you can do if you’re in a Treasury or a finance ministry there. There is some flexibility there but you you can only do that for so Long. Yep. So I’ll put this in the show notes. There was a great article in the Financial Times earlier this year, which explained this. And it wrote that in order to create additional borrowing capacity, Yellen on Thursday said the Treasury would cease investments into the civil service retirement and disability fund, as well as the Postal Service retiree health benefits fund. So that’s one of the extraordinary measures that they’re being taken to, to really just delay the inevitable when that lack of ability to borrow new money from the market, so the ability to issue new debt, I mean, eventually, you’re going to need to do that. And, and Janet Yellen has previously said that, that critical date is essentially first of June or early June. So as you said that before and we’re fast approaching that date, aren’t we? So? Any thoughts so far, Arturo?
Arturo Espinoza Bocangel 11:02
Well, he’s a very important issue, the in well, in the worst case, or worse scenarios, one effect on the global economy.
Gene Tunny 11:15
Right. So you’ve found there’s a note from the White House, isn’t there? They’ve done some analysis? Yes,
Arturo Espinoza Bocangel 11:21
yes. In the White House, they have published I article, which is a potential economic impact of various debt ceiling scenarios provided by the CEA, the Council of Economic Advisers. The point to be highlighted here is that, for example, there are some estimates about economic effect of debt ceiling standoff for the third quarter 2023. For example, in terms of jobs, the American economy would lose around a point three millions of jobs, just in terms of real GDP, annualised growth, they will lose 6.1. And then deployment will reach almost 5%
Gene Tunny 12:13
G. Given Yeah, okay, I’ll have to I’ll have to look at the night to see how they’ve calculated or given those job losses you reported, I would have thought unemployment would would end up being higher than that in that scenario. Now, a couple of things to think about. It’s from the White House. So it’s they’ve got an agenda clear. They want the debt ceiling increase, they want the Republicans to agree to that with very few conditions. So we’ll come in, it’s going to be self serving to an extent. And I mean, it’s one of these things, how do you actually model this? This scenario? We haven’t really seen it before. We’ve seen plenty of government shutdowns. before. I think Michael had an estimate in his note that there’s been a it’s been over a dozen since 1980. If I remember correctly, I’ll put a link to that. I thought, Michaels No, it was really, really great. So yeah, I mean, it’s clearly would be bad. I mean, it’s a US government just completely was unable to function effectively, because it couldn’t borrow any new money, but it still had to make it was still obligated legally to pay Social Security benefits Medicare, and it also still wants to fund defence and all the other things the US government does, there. Yes, it’s got a problem there. And there have been various ideas floated for how the government could possibly get around it, but the legality of them is a bit suspect. There’s a view that Well, Congress is effectively saying, one view I’ve heard is that, because Congress is sent two different sets of instructions to the White House to the executive, it’s up to the executive to the White House to choose which set of instructions to follow. So on the one hand, Congress is saying you can’t borrow any more than $31 trillion, you are sorry, you can’t have that as your total debt, anything more than that. So once you hit that, bad luck, you’re not going to get any new funding. But then, at the same time, Congress has also told the White House has told the executive government that you have to fund these social security benefits, you have to pay this in Medicare, etc. And so there’s this conflict there. And and so one view is that we’ll the Biden administration should just ignore the the debt ceiling, but then yeah, then it’s operating in a very legal grey area, or probably a red area or however you describe it, it’s possibly illegal. The other idea is is trillion dollar coin. Have you heard this idea that the because the US Mint has the power to well, the US Treasury, the US Mint can mint coins, it has the power to do that it could essentially meant a $1 trillion coin, like a platinum coin would stay $1 trillion. This was one. This was one idea this was floated over 10 years ago, the last time they had a debt crisis. And the idea was your walk that trillion dollar coin after the Federal Reserve, and then say, Oh, here’s our deposit, can you put this in our bank account? So suddenly, we’ve got an extra trillion dollars. And that’s another thing that the legality of it was probably questionable. And, and look, it doesn’t, it doesn’t solve the problem. And in that sort of getting into the modern monetary theory, approach, where the government’s just printing money, creating new money, whereas what you want to be doing is, you do want to be selling the bonds into the private market so that you’re not adding to the money supply with your fiscal policy. So it’s important to be able to borrow from the market if you are going to run deficits. So yeah, really, really tricky. tricky situation there. Any any questions on that? Arturo?
Arturo Espinoza Bocangel 16:14
Probably the equity or the share market is like, quite volatile at this moment, given this, this issue.
Gene Tunny 16:22
Yeah. And imagine what would happen. I mean, the markets would just go crazy if they don’t resolve, which tends to suggest that they will resolve it somehow, because the Republicans there. They believe in America, they don’t want to harm America, they’ve got donors who, who don’t want the economy to crash. And so I think ultimately, there will be some sort of compromise, but it’s a bit of a game at the moment. It’s brinksmanship, as they call it, they want to get as much as they can. The problem is, and there was a great conversation I had last year in October last year, with Romina Bochy, she is a fellow at the Cato Institute in Washington, DC. And she was explaining how this is, it’s about it’s a spending issue. It’s that they’re spending too much relative to their revenue. And we talked about the structural deficit in the States, as in Australia, we’ve got this structural budget deficit, we’ve got this gap in sort of normal times, or if you think about trying to abstract from the economic cycle, try to control for that you’ve got this gap between revenue and spending. And given that tax increases are unpopular, and it’s so difficult to for governments to raise taxes, and there is an economic efficiency, cost with taxes. So you do want to keep taxes as low as possible. That’s not something they can adjust. But then at the same time, they’ve got these entitlements, such as Medicare and Social Security, that mean that government spending is just going to keep increasing. And it’s a big challenge. And they’ve also got the military now that could argue that I mean, does the I mean, America does spend a lot on the military. I saw the numbers from the US Treasury, the US Treasury fiscal data. I’ll put a link to this in the show notes. And you can see where the the federal government is, is spending its money or spending the money of US taxpayers, I should say, That’s stopped working on my machine. But it was a great chart. I’ll put a link in the show notes that I think it’s about $800 billion or something is it that’s spent on defensive you got it there, Arturo.
Arturo Espinoza Bocangel 18:45
You talk about the national defence? Yes. Is 767 767
Gene Tunny 18:54
billion was that in 2022 2020? Yeah. So there’s a lot there. Now, the US spends much more on national defence than any other country, but at the same time, it is one of the global superpowers and plays an important role in global security. So that’s a big, that’s a big challenge. Maybe you can get some efficiency gains in the Pentagon, there is a bit of concern about the efficiency of spending of defence spending. There’s concerns about the Pentagon failing audits. I don’t know if you’ve seen that John Stewart really ripped into one of the Pentagon officials department.
Arturo Espinoza Bocangel 19:36
So the problem there
Gene Tunny 19:39
are essentially she was asking her well, should we? Is it good enough? It’s been he’s employed, implying is not good enough that the defence department can’t account for all the all the money that it’s spending and it’s failing audits. So then she was saying, yeah, it is a problem. We’re trying to fix it. And he was really going after it. And rightly so they’re spending nearly $800 billion. But guess what, what if you look at the spending data, what I’m trying to say is that it’s difficult, given what they’re spending money on, and the big ticket items are health, Medicare, Social Security defence, you can’t really make the budget adjustments without touching some of those spending areas if you don’t want to raise taxes. And that’s probably not going to happen. But then if the problem that they’ve got in the US is that all of the the way you would fix this is by modifying programmes that are popular or going after the defence budget, and that’s going to be difficult because of the concern about the conflict with grants, growing risk of a conflict with China, so they won’t be able to do that. And politically, it’s very difficult to do anything about Social Security and Medicare, and Donald Trump came out and the other the other month, I think, a month or so ago and said, Look, I’m not going to touch it. So given Trump has declared that other Republican candidates, they won’t be able to, to propose any changes. So it’s, it’s going to be very difficult that they might be able to make some savings in, in other areas, but then you’re talking about things like the Department of Transportation or, or the EPA, other agencies like that Housing and Urban Development, perhaps, if that’s still around. So it is, it’s going to be very difficult for the US. Okay, yeah, yeah, HUDs. Housing, urban development certainly does still exist as an agency. Okay, so that’s the debt ceiling. I mean, we don’t really know how it’s going to play out, I think most likely, they’ll come up with some deal. So they will have to be some cuts to non core, maybe non core is not the right word. But they’ll have to be some cuts to agencies within programmes which are less popular. So that’s what we’ll we’ll end up seeing the Republicans will declare a win of some kind, maybe they’ll get some commitment that over five or 10 years, there’ll be there’ll be particular reductions relative to the baseline. But I mean, some they’ll have to, they’ll have to lift the debt ceiling, because the alternative is just so unknown, and new cause such global uncertainty, really, and potentially, lots of economic, economic pain for the US and for the world, given the role of the US and the global economy. And he thought so to her
Arturo Espinoza Bocangel 22:49
while thinking about the when I talk about when we talk about a ceilings of any timing economics. I think that individuals tend to spend spare, for example, if you say to your friend, you, you’re allowed to spend $100, yes, some maximum money they can pay you in order to pin one, let’s say to buy alcohol or drinks. Of course, the the train is gonna spend $100, I think that kind of ceilings are not optimal in economics, because people tend to reach that point, every time they have the opportunity.
Gene Tunny 23:37
Right. I think I understand what you’re saying. So psychologically, but wouldn’t that be suggesting that there could be a benefit from a ceiling? I mean, I don’t I don’t think that I don’t think there should be a ceiling on on this sort of thing, because I don’t think it’s helpful. And it does lead to situations like this. But if you’re saying like, psychologically, that this is, I think, in some cases, like, if there’s someone who has impulse control problems, then maybe they need to have some ceiling to control their, their, their behaviour. So I think, part of the logic for having the ceiling in the first place in the States and we had one in Australia, I’ll talk about that in a moment. It was the limit the the potential of the President to go and borrow a lot of money because there was a concern 100 years ago, or something that the President could go and borrow a lot of money for the to, you know, fund their own programmes and, and get around the Congress. And so they imposed a debt limit of much lower than it is now because it’s been increased over the years as the economy has grown, the federal government’s grown and they’ve, they’ve have needed to increase it. So you can see why they they might introduce it. The problem comes when you’ve got legislation that tells the government to spend money on other things and the spending is mandatory. There’s not there’s no discretion there. It has to provide the Social Security benefits by law or Medicare based on the legislation. And so you’ve got one active congress this priorities. Yeah, that’s conflicting with the other legislation. So this is why I think there is some logic to this, the concept that the Congress has sent two sets of instructions that are incompatible with each other, and therefore the White House should have some discretion in how in how to deal with it. I mean, I’m quite sympathetic towards that argument. I just think legally, it’s, it’s, it’s problematic, it’ll, it’s most likely problematic. So yeah, but one thing I would have thought I’d mention is that we had this issue in Australia here, about 14 years ago, when I was in the treasury, and this was one of the things I was responsible for, we had to amend the, what was called the Commonwealth inscribed STOCK Act. This is quite amusing. When you think about where federal debt is now. I mean, maybe it’s not amusing, or it’s amusing. It’s black humour. It’s, it shouldn’t laugh about this. But prior to the financial crisis, we only had $50 billion of government bonds on issue, because we’d pay down all this debt, partly because we sold off some public assets or government owned businesses like Telstra. And they set in the legislation in Section five, I think it was at the Commonwealth inscribe STOCK Act, they set a limit of $75 billion for government bonds on issue. Okay. And then as soon as we have the, we get into the financial crisis, and they only I think they set this limit in 2007. Okay, so come, we get to the end of 2008. And this is when I’m in budget policy division in the treasury. And we do the forecasts as to, you know, what’s happening with revenue. And then what’s happening with with the borrowing requirement, I mean, we suddenly had to start borrowing new money, we had to start increasing debt, because we’d have to be running deficits. We this federal government wasn’t running deficits. But now with the collapse in revenue, and the possibility of, of stimulus spending that the government wanted to enact or bring in, then we’re going to be running deficits would have to borrow, borrow money, and add to the debt. And this was going to be difficult, because there was a $75 billion limit. Now, when we did the budget update over the next month or so. And we published it in early February. And it was clear that the debt was heading toward 200 billion. So we had it was 50 billion before the financial crisis, then and the debt limit was 75 billion. But when we did the projections are the forecasts in Wait, oh, eight, early Oh, nine, we ended up figuring out we needed to lift that limit to 200 billion. And so we had to change the the act of parliament, it’s just changing one number, we had to change 75 to 200. But our cause such a political mess, and Malcolm Turnbull, the opposition leader decided to oppose it. And yeah, and the government got it up with the support of the crush the crossbench senators with the greens, I actually remember going with David Parker, who was acting treasury secretary at the time, and we had to go and talk to Bob Brown and his staff. He was he was head of the greens in Parliament House, we had to say why this was important? Well, it’s the same thing. I mean, the government has these commitments, it’s required to spend money on these different programmes. And you then can’t say that they can’t borrow the money to meet that to actually meet those commitments. It’s, it’s inconsistent. It’s not, it’s not right, you should lift the you need to lift the the debt limit, or there’s going to be bad consequences, the government might be able to pay to make payments or it won’t be able to enact stimulus measures. Now, there’s a debate about whether stimulus measures are unnecessary or desirable. And I’ve had some episodes on that. I might link to one with Tony Macon. So that’s an that’s an issue for another another day. What I was just emphasising is that the US is now I think I’ve heard it expressed that it’s the only country which has this actual debt limit, or it’s got this conflict between what the debt limit is and what other legislation tells the government to do. But we did have this in Australia about a well over 10 years ago, they amended it they got rid of this legal was about 10 years ago or so now, but we did have this issue. So I just thought I’d note that was that something I was personally involved in in Costa It caused a little bit of angst at the time, it was a huge political issue. Yeah. So yep. So there’s a again, we’re recording this on the 25th of May. So who knows? It may be resolved by the time this episode is published, but I doubt it. I think there’ll be negotiating right until the last minute and the Republicans will be trying to extract as much as many wins or gains as they can. Now, I’m not saying they’re badly motivated. I think they genuinely believe that there’s too much federal government spending and, you know, they, they do want to make savings there. But, look, it’s so difficult politically, because the programmes they probably need to cut according or to adjust, according to Romina had that great conversation with her last year. They are politically popular programmes, so it’s going to be very difficult. Okay, we’ll take a short break here for a word from our sponsor.
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Gene Tunny 31:29
Now back to the show. You’ve been looking at what’s happening in Argentina, I saw a news report the other week that the as a central bank have to they’ve had to put the interest rate up to 98% or 90%. Yeah, that’s, yeah. So what’s going on in Argentina? Well,
Arturo Espinoza Bocangel 31:49
I think Argentina in the last decades, is facing these problems, economic problems in terms of inflation, and also exchange rates. Both problems are the most important that Argentina are not able this case I’m an internet is not able to deal with it, or solve it. Currently in Argentina, there they are facing a soaring inflation. Also, there is a what there is a lack of USA dollars,
Gene Tunny 32:26
or on what’s the inflation right there.
Arturo Espinoza Bocangel 32:28
In April, the monthly inflation rate reach 8.4% 8.4%. Monthly. Yes. And the annual inflation rate was more than 100%. More than 1%.
Gene Tunny 32:42
Yeah. And is it the problem we talked about in our episode on hyperinflation? I mean, it’s not a hyperinflation yet. Technically, because then you Hyperinflation is when you have 50% a month, I think, is it just bad government? Fiscal policy? Is it money printing?
Arturo Espinoza Bocangel 32:57
The main one of them employment or mayor permanent is? Lack of fiscal rules at the school? What sorry? Rigorous?
Gene Tunny 33:07
Do you mean, they don’t follow good public finance practices? Yeah. Right. Yeah. Yeah. Okay, I might have a closer look at that. But I was just really stung by the what’s been happening there with the inflation and the interest rate, because it’d be there a country that in the past, they’ve had, you know, problems have borrowed too much money they’ve had to default effectively, and, you know, renegotiate with creditors. Yeah, I’ve
Arturo Espinoza Bocangel 33:35
found also that this inflation, has pushed one in four people into poverty in our country, in this case, Argentina that has battled for decades with high inflation. Yeah. And also, if we had another problem, which is the historical the historical drove, seen last year, which has damaged the Argentinian soybeans because they are the major producer of corns with and soybeans and they rely on on the export of those. Yeah, also, they are not receiving enough use of American dollars. So there was there’s no problem there.
Gene Tunny 34:17
Yeah. The extraordinary thing about Argentina is that it was once one of the richest countries in the world wasn’t it in the late 19th century? During the gold during the gold rush? Yeah. Yeah. And just bad policy over the 20th century. Was it? Was it the bronze who are in Argentina Yeah. Why and Aveda Braun? Yeah, yeah, just really beyond bad economic management. So yes. Anything else on that odd zero on Argentina,
Arturo Espinoza Bocangel 34:50
just to that there is a mediatic presidential candidate named Emily has allowed to burn to burn The central bank so they, they want to Oh, he wants to shut down the Argentinian cell from bang. If he assume HIV takeover the president, she’ll office.
Gene Tunny 35:11
So what did you say he’s a candidate is? Did you mention his party? Did you or?
Arturo Espinoza Bocangel 35:16
No, I haven’t mentioned the party, but he’s leading the boring.
Gene Tunny 35:22
Right. So he wants to get rid of the central bank. Does he want to replace it with a new central bank?
Arturo Espinoza Bocangel 35:27
Probably? Yeah, sure.
Gene Tunny 35:30
Well, given the given the problems that have gone in Argentina, I mean, who knows? I mean, maybe you need some radical approach like that? I really don’t know. I’d have to look more closely at it. It’s, yeah, it’s a bit of a mess. Right. Okay. Well, I mean, luckily, in Australia, and I mean, even in the US, we’ve, I mean, despite all the problems we’ve been talking about, we do have, we have had generally better management than, say, Argentina. But but let’s say they sorted out because you I think you made a very important point that the, the misery that this causes the misery that comes from bad economic policy, was it one in four people who’ve gone and been thrown into poverty? And that’s what inflation does, right? It erodes the value of, of the money that you’re holding? And, yeah, it’s really bad. And if you’re on a fixed income, or if you’re on a pension that’s been paid in dollars, a certain amount of dollars, then inflation goes up, you’re in a whole lot of trouble.
Arturo Espinoza Bocangel 36:33
They’ve retired. Suffering from
Gene Tunny 36:37
Yeah, and I mean, our pension is here in Australia, as suffering from the inflation we’ve experienced. And now we’ve just learned about 22%, or whatever it was increase in electricity bills. Right. Okay. So that’s, that was Argentina. The other thing I wanted to talk about Arturo, is this, this developing market or developing economy, emerging market, debt crisis that we’ve that’s become quite prominent and was talked about at the the IMF World Bank spring meeting that they have in, in DC, and this was in April, but it’s still still going on. This is something that an issue which will be with us for some time. And what we’ve seen is that there’s been this big increase in, in debt of many developing economies over the last decade or so. And China’s playing a part in that. And this whole debate about China debt trap is China and trapping countries, by lending the money and then seizing their assets when they can’t repay as at lending them for and knowing that they’re not going to be able to repay. Now there’s a big debate about that. I might have to cover that in a specific episode, because I know one of the things we’ve been looking at on this show is, to what extent should we worry about China? To what extent is China a threat? What does that mean for the global economy? And I mean, I’ve been trying to get a wide range of views on that. There was a paper in the wall, there was an article in The Atlantic Monthly from some quite prominent academics in the States. So Deborah Browder, gam from the China Africa Research Initiative. And she’s a professor at Johns Hopkins, very famous school over there. And Meg rothmeyer. Meyer, who is a associate professor at Harvard Business School, so an equally famous school. And they argued that the Chinese debt trap is a myth. So I’ll put a link to that. And they go over all the complexity of what actually happened in Sri Lanka when, when the Chinese bank, I think it was took over that, that port. So there’s a bit of a debate about that. But there’s no doubt that there is this developing economy debt crisis at the moment, we’ve had large increases in debt to GDP. And one of the things that the managing director of the IMF pointed out in the, in her opening remarks is that of this very high percentage of well, not well, you could say it’s, it’s high, if you think about what it means. So 15% of low income countries were already in debt, distress. And so we’re talking about countries like Zambia is is one of those countries in various other African countries. And they’re having they’re having problems paying back their debts. And then there’s this need, potentially to restructure their debts reach a new agreement with their creditors. And one of the one of the issues that we’re we’ve, we’ve discovered, and this is something that’s concerning commentators, and it’s also concerning the IMF because they’re caught in the middle of this. The Economist has called this a nightmarish identity crisis. For the IMF, it said it’s caught between America and China, its purpose is unclear, because an increasing amount of the debt that that has been accumulated by emerging economies, it’s coming from China. And that’s, and that was before Belt and Road Initiative. But it’s also associated with this new Belton Road initiative that Xi Jinping has introducing that is introduced, because a lot lot more of it’s coming from China, then it’s, it’s difficult because the IMF when it wants to assist countries, if they get into trouble, because the role of the IMF is to try and guarantee financial stability and one, one thing they do is to provide emergency lending, Short Term Lending to countries that get into trouble. But what we’re finding now is that because China is involved, it’s one of the creditors. Usually the IMF wants the country to renegotiate its, its debts with its its creditors. It wants to make sure it’s sustainable. It can it’s got sustainable debts, that it’s it’s going to be in a good position to to repay the IMF, if the IMS gonna lend to it, it’s going to provide some emergency assistance, that that countries might need to help shore up their exchange rate or to help them actually meet their their debt obligations. Because part of the problem is that if you’re an emerging market economy, you typically have to borrow in foreign currency you have to borrow in US dollars. For example, actually,
Arturo Espinoza Bocangel 41:50
Argentina has received almost 44 billion from the IMF,
Gene Tunny 41:54
sorry, Argentina has received 44 billion Yep. So Argentina is part of this part of the story. Yeah, but what they’re finding, and this is, this is something that is really a concern to the people in in DC and London and the other, the other Western capitals. The problem is that China is playing hardball in the negotiations, and it’s been difficult in terms of the renegotiation of the debt. I mean, support is a China also has just been like any other creditor in the past, like US banks may have been in the past. But it’s essentially saying that if the US or if the IMF is gonna come in and lend money, then they have to lend on concessional terms to they have to share the pain with with China or with other creditors. So historically, the IMF has been superior to the IMF and World Bank, they’ve been superior to other creditors. But now that China’s involved there, China’s pushing back. And yeah, it’s a rather fast, fascinating story. I’ll put some links to these articles from the economist in the FT but possibly paywalled. So maybe I’ll also try to find some some articles that don’t have a paywall. But basically, this is part of this new conflict that we’re seeing between the US and its allies and China. So we’re seeing, you know, this is another area of tension and other another aspect of that, that conflict. That is that’s heating up. So I just found that really fascinating that we do have this emerging market debt problem again, I mean, this was a huge issue in the in the 80s, then it was Latin America. And now it’s a wide range of countries, including Papua New Guinea to our north, apparently, I saw that they’re a country that’s high risk of fiscal distress where they, they need to, yeah, they may need to renegotiate their debts. So it’s countries in Africa and
Arturo Espinoza Bocangel 44:11
in the case of PNG, Australia, would play an important role in case they they fail in some economic indicators, or
Gene Tunny 44:23
Yeah, I mean, we do provide assistance already to PNG and I think yeah, worst case scenario, we would have to do something because it’s, it’s to our north,
Arturo Espinoza Bocangel 44:33
but now with the Chinese presence is that is gonna be different.
Gene Tunny 44:39
Well, I know they’re in the Solomons ought to look at what China I mean, I guess China is trying to get influence all around the Pacific. But yeah, I mean, I think we would try to, you know, make do it. Do as much as we can for to, you know, to help out p&g Given that it’s to our north, and it’s strategically important. I mean, when we fought the Japanese during World War Two, there was fighting in PNG. Right. So that was a battlefield. Okay. So, yeah, it’s strategically important. Now, yeah, I’ll put a link to some information about PNG and this, you know, how it figures in this conflict with China or this geopolitical tension, maybe not maybe conflicts around work, because I’d like to, I’m hoping that that we are going to be able to, to maintain peace. The alternative is just so horrific at the same time, we need to we do need to protect our national interests, and be conscious of any attempts to go against that. Yeah. So yeah, China’s Yeah, the Chinese President Xi Jinping visited Papa New Guinea four years ago, there was no doubt about China’s green ambitions in the region. This is saying that much of China’s promised aid and investment never materialised. So Beijing is trying to ingratiate itself with PNG. It’s a great defund construction of a hospital for PNGs. Military. So I guess it is an issue that we do need to watch. But we’ve got a star, we’ve got historic links with PNG, Australia is very close to PNG, the Australians living over there. And so I’d like to think that PNG is not a country, we need to, to worry about. And I’m confident that maybe there’s a bit naive, but I expect that we would be able to work, we will be very conscious. And we will we will make sure that we don’t lose png if it if it comes to any sort of any sort of conflict with China. Okay. So there, my thoughts are, I’ll put links to relevant data, there’s a great statistical annex that the IMF puts out, and it’s public debt monitor that shows just how much these public debts have been going up. There’s some great material on what’s been happening with the IMF and how it’s facing this identity crisis. And it’s part of this whole. The problem we’ve gotten now is that, well, we had a post war world, which was essentially underpinned by American preeminence. And I’m talking about the Western world, the communist world did its own thing. But then it collapsed in 89 to 91. So that’s no longer an issue. You know, Russia, of course, is a threat and of its, its decoupling from the West, China, I mean, very difficult, because it’s such an it’s a very populous nation. There are great benefits from trade. But there is this growing tension that we’ve talked about on this show. And one of the aspects of, of this tension is in the international financial system, and it looks like the the preeminence of will, the massively important role the IMF and the World Bank have played in the past. Now they’re in competition with, with China and China’s making life difficult for the IMF, it appears from what I’ve been what I’ve been seeing. And the IMS seems to be failing in this mission, really, it’s had all of this additional, what’s got all this capital that will finance or these got these financial resources that could deploy, that it’s been unable to deploy? So the effectiveness of the IMF is in question. So the economist talked about how nearly $1 trillion so 1000 billion has been injected into the funds since COVID. began to spread, but its loan book has grown by only $51 billion. So yeah, the the economist is painting this picture of the IMF is as really not as effective as it can be. It’s and caught between America and China. So Well, I mean, we may need a we may need a rethinking or re creation of these international financial institution. So that might be something we find some international expert on and talk about on the show in the future on on Argentina, we’re going to try and get a local expert on Argentina to talk about that. So yeah, Julie, so that was a bit of a whirlwind tour of some major macro economic issues that we’ve been monitoring. Arturo anything before we wrap up anything else?
Arturo Espinoza Bocangel 49:57
No, I think this Question was very informative.
Gene Tunny 50:01
The one takeaway I would, I would suggest, as a takeaway I always like to make is that it’s so critically important to get those your government budget under control to get your institutions, right. And, yeah, really, really try and avoid accumulating unnecessary debt. I mean, you can borrow to build arguably, but when you’re in a situation when you’re borrowing money just to to meet recurrent expenses, which is essentially what’s happening in the states now. And you know, it’s happened in multiple countries around the world, when you you’re not getting a return on that investment, then you’re gonna get into trouble. And we just see this time and time again, unfortunately. So just the main takeaway, I think, is just be very conscious of, of what you’re spending if you’re, if you’re in government, if you’re a policy advisor, just be really cautious. And that’s, that’s what I’d say there. And that’s what you’d probably expect a former Treasury person to say. So. Very good, Arturo. Again, thanks so much for your time, and thanks for listening. If you’ve enjoyed this, if you have any questions, let me know. I’d love to hear from you. Contact at economics explored. Thank you. Right Oh, thanks for listening to this episode of economics explored. If you have any questions, comments or suggestions, please get in touch. I’d love to hear from you. You can send me an email via contact@economicsexplored.com Or a voicemail via SpeakPipe. You can find the link in the show notes. If you’ve enjoyed the show, I’d be grateful if you could tell anyone you think would be interested about it. Word of mouth is one of the main ways that people learn about the show. Finally, if your podcasting app lets you then please write a review and leave a rating. Thanks for listening. I hope you can join me again next week.
52:05
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Credits
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