Back in late 2008 and early 2009 most people focused on “the debt crisis” as being “the problem.” But debt is a problem only to the extent that it exceeds one’s ability to repay the loans, which depends on one’s income. A few of us market monetarists argued that you also needed to look at the denominator of the debt/income ratio, not just the numerator.
This NYT piece by Landon Thomas Jr. never uses the term NGDP, but that’s exactly what they see as Europe’s real problem:
The ratio of Portugal’s debt to its overall economy, or gross domestic product, was 107 percent when it received the bailout. But the ratio has grown since then, and by next year is expected to reach 118 percent.
That’s not necessarily because Portugal’s overall debt is growing, but because its economy is shrinking. And economists say the same vicious circle could be taking hold elsewhere in Europe.
Two other closely watched countries on the debt list, Spain and Italy, also have rising debt-to-G.D.P. ratios “” even though they, like Portugal, have adopted the budget-slashing and tax-raising measures that the European officials and the I.M.F. continue to prescribe.
Government debt is nominal debt, not indexed to inflation. That means the debt /GDP ratio is the ratio of debt to NGDP, not RGDP. Maybe that’s obvious, but most of the time when the media refers to “GDP” they mean real GDP.
Glad to see the NYT echoing market monetarist talking points from 3 years ago.
And there seems to be at least one blogger in Portugal who understands the real problem:
“Portugal would save 3 billion euros a year if it restructured its debt,” said Pedro Lains, an economic historian and a blogger at the University of Lisbon.
Mr. Lains spoke not only as a theorist. He feels austerity firsthand. Because his salary at the government-run university has been slashed by 30 percent in the last year, his family has needed to dip into its savings.
He said that wage contraction throughout the country was prompting increasing numbers of Portuguese to leave the country, even as their government labors to prove it is worthy to remain part of the euro zone.
Why, Mr. Lains asks, should he and his fellow citizens suffer while the bondholders get their money back? “It’s not the fault of the Portuguese people,” he said. “The fault lies with the structure of the euro.”
That’s not to say Portugal doesn’t have real problems, but the ECB needlessly turned those real problems into a crisis.