Patrimoniale

The leverage of real rates to avoid capital losses

What are the causes of the continuous and constant increase in the debt/GDP ratio and how can we go back? Some causes are attributable to the ruling and political class which did not have foresight on phenomena such as demography, technology, globalisation, conversion to the euro…or pretended nothing happened! By analyzing the macro numbers of the state public budget, Fred of St Louis identifies 3 paths: 1) Austerity: spending cuts and/or higher taxes 2) Negative real returns: nominal interest rates at which the state is financed are lower than the inflation rate 3) Economic growth: GDP must grow faster than debt (as per the report) The only way Italy can currently take to avoid a financial crisis and reduce the debt/GDP ratio is to have real growth greater than real rates.
What it means? We see.
History is the best teacher to understand what has happened in our country, but not only, in the last 50 years of economic history.
1) Italian nominal GDP was greater than nominal debt until 1992; from 1993 to 2008 it was however quite correlated, after Lehman Brothers the banking market died and with it Italian growth.
The unconventional expansionary policies of the ECB (up to negative rates) have widened the gap with the debt, creating a wide spread in 10 years in which monetary policies, in Europe and beyond, have replaced fiscal ones.
It was the defeat of the policy on capital, which today rules, as demonstrated by the power of the Big Companies (especially tech) compared to the States which are limited in their decision-making power, due to the terrible ruling class, no longer being able to generate income ( GDP) unlike large listed companies.
The austerity imposed in 2011 by Europe through Monti, as well as failing and requiring Draghi's intervention (July 2012) which paved the way for QE, destroyed domestic demand, the real engine of GDP, focusing on exports as emerging countries do.
Italy at the mercy of financial jackals ready to do business or buy the best jewels (businesses) of the Bel Paese.
2) In the 1960s until the early 1980s, Italy had a positive net foreign position and a debt/GDP under 60%, today we once again (after about 30 years) have a positive net foreign position (guarantee for debtors) but the debt/GDP at 143.5%.
The asset risk is high, considering that the country is like an old decadent nobleman: it has many assets but is unable to create income (GDP) so it is forced to sell the family jewels.
How to avoid a capital injury? 3) When did the debt/GDP ratio fall? Meanwhile, let's remember that in the 1980s it rose due to the generous policies of the 1970s regarding welfare (pension system unsustainable in the long term), for the tax reform, for the establishment of the regions, to guarantee education and health for all.
The Catholic-communist model that was supposed to put out the fires of terrorism.
The first decline in the debt/GDP ratio will take place in the period 1993-2008 with the convergence towards the euro and the decrease in interest rates, especially the very high real ones in the mid-1980s.
In the period 2015-2019 the ratio was stable and then fell again in 2022 thanks to negative real rates.
4) Is it all thanks to the trade balance? The latter was positive in the 90s and from 2012 to 2021, negative with the war and inflation in 2022, now positive again in 2023.
From the mid-90s until 2007 the trade balance was on average zero.
Exports represent the lifeboat that has supported the country for a long time but, as demonstrated by the 2021 GDP, without internal demand we are going nowhere.
5) The solution: Italy grew in a context of decreasing real rates (negative only in 2022) lower than real GDP growth rates.
Negative real interest rates (inflation>nominal interest) lower the debt/GDP ratio as do positive real country growth rates (GDP>inflation): real GDP>real market rates.
When did it happen? In 2021/2022, while in 1995-2007 real rates fell faster than those of GDP, allowing a decrease in the ratio (in 2016/2019 they fell to zero, in fact the ratio remained stable).
Giorgia Meloni should understand that the debt/GDP ratio, among various and diverse causes, grew due to overly generous real rates in the 1980s (the famous bot people with inflation at 4.5% and rates at 12% in 1987, high the Italy risk) while the central banks, by killing the interbank market, have saved the day since 2008 but at a high price: how can we bring the relationship back and implement restrictive monetary policies today? The state must find capital, yes, but not for BTPs, but to invest instead in the real economy (see 110% bonus even if managed in a scandalous way, but it was an incentive to internal demand, even if at a high price), with more infrastructure and less bureaucracy (time and certainty of justice) would then come from foreign private investors who today are afraid of disorganization, the parasitic state and the underworld so they don't invest but buy and take away.
Since we gave up the leverage of exchange rates and rates, the only blunt weapon has been the monetization of debt by the central bank, but we are not in the 80s with low ratios and the possibility of devaluing (with all the risks and problems connected).
Growth passes through investments in human capital, technology and risk capital: no more debt! read also Why will 2024 be the year of small caps?

Author: A.W.M.

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