IMF’s Lipsky Says Advanced-Nation Debt Risks Future Crisis as Yields Set to Rise

If any of you can forward this to John please do, thanks.
We went through all this from way back in his Salomon Bros. days- he should know better.

Comments below.

Lipsky Says Advanced-Nation Debt Risks Future Crisis as Yields Set to Rise

By Kevin Hamlin

March 20 (Bloomberg) — The mounting debt burden of the world’s most developed nations, set for a post-World War II record this year, is unsustainable and risks a future fiscal crisis, the International Monetary Fund’s John Lipsky said.

The average public debt ratio of advanced countries will exceed 100 percent of their gross domestic product this year for the first time since the war, Lipsky, the IMF’s first deputy managing director, said in a speech at a forum in Beijing today.

“The fiscal fallout of the recent crisis must be addressed before it begins to impede the recovery and create new risks,” said Lipsky. “The central challenge is to avert a potential future fiscal crisis, while at the same time creating jobs and supporting social cohesion.”

John, there is no potential future fiscal crisis for nations that issue their own non convertible/floating fx currencies.

Lipsky’s view clashes with Nobel laureate Joseph Stiglitz, who told the same forum yesterday that further fiscal stimulus is needed to aid growth, and that European nations focused on austerity have a “fairly pessimistic” outlook. At stake is sustaining the developed world’s rebound without a deepening in the debt crisis that’s engulfed nations from Greece to Ireland.

Long-term bond yields could climb 100 to 150 basis points, driven by the 25 percentage point rise in sovereign debt ratios since the global financial crisis and projected increases in borrowing in coming years, according to Lipsky.

So? You know there is no solvency issue. So do you forecast increased aggregate demand, a too small output gap and too low unemployment because of that? What sense does that make???

A basis point is 0.01 percentage point. Yields on benchmark 10-year Treasury notes closed at 3.27 percent last week, with comparable-maturity German debt at 3.19 percent and Japanese bonds at 1.21 percent.

‘Unsustainably Low’

Bank of England Governor Mervyn King reiterated his view at a conference four days ago in Beijing that “long-term real interest rates are unsustainably low” in the aftermath of policy makers’ unprecedented monetary stimulus during the 2008 financial crisis.

And Professor Geoffrey Harcourt’s star pupil, of all people. Shame shame shame. What’s his problem- unemployment might get too low???

Total U.S. public debt was more than $14 trillion at the end of 2010, a 72 percent increase during five years, while Japan’s debt is about double the size of its $5 trillion economy. The European turmoil has forced policy makers to create rescue packages for Ireland and Greece.

This is slipped in now for the second time by Kevin Hamlin, the author of this article, in a way that suggests its associated with Lipsky, King, etc. though he obviously didn’t get any direct quotes from them, or he would have used them. In any case, its an inexcusable error to push the analogy that Ireland and Greece, users of the euro and not the issuer (the ECB is the issuer) are analogous to currency issuers like the US, Japan, and the UK.

While interest payments on debt have remained stable at about 2.75 percentage points of GDP over the last three years, “higher deficits and debts together with normalizing economic growth sooner or later will lead to higher interest rates,” Lipsky said. The IMF estimates fiscal deficits for developed nations will average about 7 percent of GDP this year.

The cost of repaying debt would increase by 1.5 percentage points of GDP by 2014 even if interest rates rise only about 100 basis points, Lipsky said.

And so what then? Create excess aggregate demand that would overly shrink the output gap? If so, I don’t see it in any IMF forecast?

IMF studies show that each 10-percentage-point increase in the debt ratio slows annual real economic growth by around 0.15 percentage point because of the adverse effect on investment and lower productivity growth, according to Lipsky, a former chief economist at JPMorgan Chase & Co.

He should know those studies are not applicable to what he’s talking about.

This entry was posted in Bonds, CBs, Deficit, GDP, Government Spending and tagged , . Bookmark the permalink.

9 Responses to IMF’s Lipsky Says Advanced-Nation Debt Risks Future Crisis as Yields Set to Rise

  1. Craig says:

    There may be no crisis associated with fiscal spending but what about systemic risk associated with leverage from derivatives?

    For example in an interview Charlie Munger said “Unlimited leverage comes automatically with an option exchange. Then, next, derivative trading made the option exchange look like a benign event. Our regulators allowed the proprietary trading departments at investment banks to become hedge funds in disguise, using the “repo” system—one of the most extreme credit-granting systems ever devised. The amount of leverage was utterly awesome. The investment banks, to protect themselves, controlled, to some extent, the use of credit by customers that were hedge funds. But the internal hedge funds, owned by the investment banks, were subject to no effective credit control at all. very people who should have been preventing these asininities were instead allowing foolish departures from the corrective devices we’d put in the last time we had a big trouble—devices.”

    The underlying cause for the subprime crisis was bad loans but the immediate cause was credit derivatives. By the end of 2006, the subprime loan market was around $1.2 trillion (representing around 10% of the overall mortgage market). But thanks to CDOs, there were more than $5 trillion of risky investments created from all the risky subprime loans – at least subprimes had real assets as collateral.

    Like you said in the Reuters interview the crisis came about because the “equity in the market couldn’t support the credit structure.” Leverage in lending can be controlled by margin and capital requirements but what leverage inherent in derivatives? Warren, i would love to read a paper of your thoughts on the nebulous subject. Something that distills derivatives, leverage, and their controls down into laymen terms for someone like myself.


  2. mike norman says:

    I believe his email address is



    thanks, everyone here send him a copy of the post, thanks


  3. Tom Hickey says:

    These boobs are concerned about “sovereign debt” when the private banking system and shadow banking are the real ticking time bombs, waiting to explode into another worse GFC. Wrong priorities at the top due to either ignorance or a hidden agenda.


    Tom Hickey Reply:

    impose a high degree of central oversight = command system = not so hidden agenda?


  4. In the “They should know better” department, how about Benedict Clements, Division Chief for the Expenditure Policy Division of the IMF’s Fiscal Affairs Department, who at Clements’s comment said, “Budget systems that cap total health expenditures and impose a high degree of central oversight can provide powerful incentives for expenditure restraint. Among the countries with a history of the lowest increases public spending, Italy, Japan, and Sweden have a greater reliance on budget caps.”

    Read the entire article to see how incredibly, this man repeatedly proves he has zero comprehension of the difference between Monetary Sovereignty and monetary non-sovereignty.

    How do these people get their jobs, anyway?

    Rodger Malcolm Mitchell


  5. Lipinsky is just the latest in a long line of “experts,” who eventually will say something like, “Actually, I didn’t mean the federal debt was too big. And I really didn’t mean the federal deficit was too big. You all misinterpreted my remarks, which really meant to say the federal government should act in a responsible and sustainable manner.”

    I’m cooking up a big pot of crow for these boobs.

    Rodger Malcolm Mitchell


Leave a Reply

Your email address will not be published. Required fields are marked *


You may use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <strike> <strong>