Baht Decline Upon Us?

[sonicdragon]

this is a serious question, why are government debts necessarily a bad thing? I have my own view that debt isn't necessarily bad, but that is a personal opinion. Why do you think it is?

And, if the government (via the ministry of finance or public debt management office) have issued debt (ie bonds) what as happend to the rating of this debt. Does anyone really think that the RTG would default?

And if tax receipts are down, why is it so? Factors which cause economic growth and downturns usually happen anywhere from 18 months to 2 years before you actually see the effects. The basic rule of thumb of central bankers is that any change in interest rates usually takes this amount of time to wash through the economy.

Honest question, I just want to see your views on this as I don't think the whole 'debt is bad' is a vailid argument.

I think it's quite hard to make a case for government debt, in the sense of budget deficits, being a good thing in general. Budget deficits are basically a hidden form of taxation. Many people would agree that budget deficits can be good as very short term help during economic downturns, but in times of economic expansion they should be reigned in, which requires fiscal discipline which is normally lacking due to it being almost entirely political and the more frequently governments change the less likely is the incumbent to do anything about it, since it will always be some elses problem soon. Asymetry in the political process make the problem even worse (it's easier to expand the deficit than reduce it). Large sustained budget deficits reduce national savings and productivity, and domestic investment leading to lower future output of the economy, encouraging a current account deficit, and become a large burden on the tax payer. Governments that lack fiscal discipline will then be tempted to print money to repay the debt leading in turn to higher levels of inflation.

That's the conventional view anyway - I'm interested in discussing more radical opinions

Edited April 20, 2007 by sonicdragon

[somtaamgaiyang]

As I said previously :

-the BOT is buying something (USD) that is just loosing value, every day.

that is what most asian central banks do since decades lead by China, Japan and Taiwan. are these central bankers all losers or do they act with a certain rationale in mind?

If I am not mistaken, the volume of USD purchases has increased by BOT exponentially during the last 6-months at the very time that China, Japan etc have divested their USD holdings to EURO and GBP???

they have divested a part of their "new" surpluses into EUR and GPB. the lion share is still (and most probably will be used for a long time) to increase their USD holdings.

will later post a website (updated monthly) concerning reserves held in USD.

1. Are you talking about China and Japan ?

2. China has a new 'basket-of-foreign-currencies' now and I think nobody can be sure at this very moment WHAT the Chinese will do with their gigantic surpluses; Beijing will carefully decide day-by-day, hour-by-hour where to put their reserves, taken the weakening US$ into consideration. It's a fragile process, very fragile.

3. The BOT/Thailand had to buy US$'s (14 Billion in 2006 and 4 Billion in the first quarter of 2007) to try and weaken the Baht a bit; if that will be successfull remains to be seen.

LaoPo

They don't have to do anything at all if they don't decide to do it. All they have done is tell the world, we are going to weaken the baht, and once this is stated as a policy, everyone has bet against it.

There are a world of things they can do legally and financially to play with the macro forces on the baht, instead they have used a very blunt sword to burst a balloon when all it needed was a pinprick. In the meidum term their policies will unravel and the country will be all the worse for it.

[samran]

this is a serious question, why are government debts necessarily a bad thing? I have my own view that debt isn't necessarily bad, but that is a personal opinion. Why do you think it is?

And, if the government (via the ministry of finance or public debt management office) have issued debt (ie bonds) what as happend to the rating of this debt. Does anyone really think that the RTG would default?

And if tax receipts are down, why is it so? Factors which cause economic growth and downturns usually happen anywhere from 18 months to 2 years before you actually see the effects. The basic rule of thumb of central bankers is that any change in interest rates usually takes this amount of time to wash through the economy.

Honest question, I just want to see your views on this as I don't think the whole 'debt is bad' is a vailid argument.

I think it's quite hard to make a case for government debt, in the sense of budget deficits, being a good thing in general. Budget deficits are basically a hidden form of taxation. Many people would agree that budget deficits can be good as very short term help during economic downturns, but in times of economic expansion they should be reigned in, which requires fiscal discipline which is normally lacking due to it being almost entirely political and the more frequently governments change the less likely is the incumbent to do anything about it, since it will always be some elses problem soon. Asymetry in the political process make the problem even worse (it's easier to expand the deficit than reduce it). Large sustained budget deficits reduce national savings and productivity, and domestic investment leading to lower future output of the economy, encouraging a current account deficit, and become a large burden on the tax payer. Governments that lack fiscal discipline will then be tempted to print money to repay the debt leading in turn to higher levels of inflation.

That's the conventional view anyway - I'm interested in discussing more radical opinions

It is a pretty good summary. Short term fiscal stimulus is something which I think works, espeically if it targets sectors or infrastructure which is needed to help growth recover. But fiscal neutrality over the busiess cycle is what everyone (ideally) should aim for - at least that is what the polticians like to mouth.

Lets talk about bonds for a sec though. What I know about bonds however, is pretty limited to what you see below....

A couple of thoughts.... The assymetry you talk about, how about the view that having an active government debt market would be a 'proxy' of sorts, a way to help instill discipline on a governemnt? A bond rating and market would be pretty good at helping to signal if they are stuffing up. Even quasi responsible governments like Thailand do pay attention to these things.

An interesting study was done a few years ago but the Federal Treasury in Australia. The government was in the midst of paying down alot of govt debt. The question was raised in OZ as to if they should stop issuing bonds all together (I assume issueing a bond would always be associated with some sort of deficit). Anyway, the response to the inquiry was not to stop issuing debt instruments, as they gave a pretty good indication to the wider market about what the risk free rate was. Is this applicable to Thailand, I'm assuming ever country needs a good base for estimating the risk profile of projects?

[sonicdragon]

Samran, yes I do believe that a liquid bond market acts as a signal for how well the economy is being managed - from that point of view it's the same as in corporate debt - bond prices will fall (ie yields will rise) when the company (or country) is not doing so well and rise when it is doing well. Obviously it will reflect interest rate policy, fiscal policy, inflation expectations and many other things. To make this a bit more controversial, I would go as far as to say that not all budget deficits are bad. The real issue is what the government has been spending the money on. I'll quote Milton Friedman here: "I would rather have government spend one trillion dollars with a deficit of a half a trillion than have government spend two trillion dollars with no deficit" (from his memoirs, p354). So long as the money is being put to good uses, there may not be a big problem with a deficit - although the way it is financed should be appropriate - for instance issuing some long term bonds for contruction of large infrastructure projects. This ties back to the idea that deficits can be used to dampen the impact of economic downturns, while they can they be reduced in the upturns.