OroyFinanzas.com: We are living in a completely indebted economy. What options do governments have to reduce this debt?
Philipp Vorndran: In principle you have four options, the first is to cut the debt like what Greece did a few months ago, you just do not pay the total amount of the debt. We will probably see this in Argentina relatively soon. Argentina is the nation model that deceives the citizens, since the official inflation rates they publish have nothing to do with reality. Thus, the first option would be not to pay all or part of the debt.
The second option is to save, spend less. I would say that if we had thought about the crisis 15 years ago, that would have been an option. Or if only one country had a debt problem, then saving and reducing expenses would be an option. But this is no longer the case at the moment because more or less all the industrialized countries have the same problem.
We will end up in a downward spiral, all the countries that try to solve the problems by cutting spending end up with horrible GDP growth figures. I would say that saving is something for the holders of the media, so that the people in Germany are happy and believe that people in southern Europe are making real efforts. Saving is not a realistic option.
The third option would be to boost the growth of the economy, that was the option in the past, normally there was a great debt after a war or after a natural catastrophe and the nation had to be rebuilt. Reconstruction generates growth and economic activity and this increases the amount of taxes and everyone works. That’s how history was in the past, I do not think we are able to get out by growing the problem of indebtedness.
If you have the public debt quota formula, there is only one possible way to reduce that debt and they are negative real interest rates, or in other words, interest rates lower than inflation, and we believe that this is the Only way still realistic.
OroyFinanzas.com: The only way for governments to get out of the crisis is to inject money and maintain negative real interest rates?
Philipp Vorndran: The only option is to have negative real interest rates, there does not have to be an increase in inflation rates, it can work with inflation of 4% or 5%. The crucial issue is that the real interest rate after taxes is negative, that is, from 2% to 2.5% below the inflation rate. If we have an inflation of 3% and an official interest rate of 1% and you have to pay taxes for half of your coupon, in such a way that the real cost of the debt is 0.5%, then you have a type of negative real interest of 2.5% that, over 10 years, is 25%. This would lower the debt by 25% and bring some of the nations closer to the Maastricht criteria.
It is not necessary to have a 10%, 20% or 30% inflation as the most pessimistic analysts argue, our argument is that you need an interest rate high enough to generate a negative interest rate after paying taxes around the 2% or 2.5%.
The interest rates are set by the European Central Bank (ECB), the Bank of England or the Bank of Japan and they can drive interest rates wherever they want.
OroyFinanzas.com: You indicate that some countries can not be saved through savings. The governments that only have the exit of the cuts, think that in five or ten years they will be able to control the debt better. How can they get out of the crisis with that option?
Philipp Vorndran: I think that a realistic option of inflation rate for the eurozone on average for the next 10 years is 4.5%. If we have 4.5% inflation and we have 10-year official ECB interest rates for Germany of around 1.4%, and a maximum of 200 basis points (2%) of spread with the most indebted countries of the euro area, then we have an average rate of 2% for the government bond, which after taxes means 3% of negative real interest rates.
If the government is able to stabilize the budgets, and not produce a primary surplus, simply stabilize it, then there would be a 1% or 1.5% debt growth and this would lead over 20 years to reducing the levels of debt to 60% or 70% of GDP.
In the worst-off countries such as Greece and Portugal, I believe there will be a new cut in their credit situation and this means that investors who put their money in nominal investments will lose around 20% or 35% of their purchasing power. They keep the same nominal amount, maybe even more, but this nominal amount only has two thirds of the original purchasing power.
In the next article Philipp Vorndran explains the instruments that can be used by governments to confiscate the assets of their citizens and businesses through financial repression.