CEO of PIMCO: The world has a budget crisis

Periodically, significant economic events take place in the world, which at first no one understands or takes seriously.

Over the past decade, several such events have occurred. These include the transformation of China into the most important source of world economic growth, which determines the dynamics of world prices, employment and well -being. Another such event is a rapid take -off and equally quick bankruptcy of shadow banking structures and mortgage companies in the UK and the USA, whose economies largely depend on the state of the financial sector.

Recently, a new topic has come to the fore: a simultaneous and sharp deterioration in the situation with public finances in many developed countries. Now it is customary to look at this problem mainly through the narrow prism of the crisis in Greece - perhaps concentrating on it. In the future, the meaning of this topic will be appreciated: we are talking about important shifts in the budget policy of developed countries, which have with a significant and long -lasting effect. Let's try to look forward, mindful of the following six important circumstances.

1. What is happening with state budgets should be considered as the last link in a series of failures of the global economy. In 2008-2009, the governments had to take measures against the crisis, which at the same time comprehended the housing, financial and consumer sectors. Now the world economy is faced with the consequences of the chosen treatment method.

In less than two years, US external debt has grown into previously inconceivable 20 percentage points of GDP. Even in the scenario of quick restoration of the economy, the ratio of public debt to GDP over the next decade will only grow (from the current, higher level).

This is not the only case of imbalance in public finances. I really liked the calculation made by the chief economist of Citibank Willem Buiter: more than 40% of the global GDP now falls on countries (mainly developed), the budget deficit exceeds 10% of GDP. Over the past 30 years, this indicator ranged from 0-5%, and a large budget deficit was characteristic mainly for developing economies.

2. Problems with state financials make us doubt the legitimacy of the usual definitions. Take a long -standing division of economies into developed and developing. Now the growing number of developed countries are subject to more risks than developing countries. The prospects for their economic development are much more modest, and the financial situation is noticeably worse than that of the growing number of developing countries.

3. The question is not whether the governments of developed countries have to bring their budgets to the balance: of course, it will have to. The question must be raised differently: how exactly this adjustment will be made (controlled or spontaneously), in what terms and with what side effects.

Typically, the authorities seek to solve the problem of accumulating “bad” debts as planned and painlessly possible - relying on the economic growth and desire of private investors to preserve and increase investments in the public debt. However, now such an outcome of events is unlikely due to the unusually high level of unemployment, slow restoration of the economy, a steady high budget deficit and an indefinite situation with financial regulation.

Therefore, countries will have to make a difficult decision - to reduce government departments and increase taxes. If this is not done in a timely manner, the probable spectrum of exits from the situation expand to acceleration of inflation (to depreciate the excess debt burden) and extremes such as default and confiscation.

4. Using their role in the process of redistribution of resources, the authorities can impose their decisions to other sectors of the national economy. This is especially significant when the business is limited to the ability to withdraw funds abroad. Now there is just such a case, since problems with the budget are global.

5. The international measurement of the current crisis will make it difficult to adjust the budget policy in developed countries. The effectiveness of attempts to bring budgets to the balance depends not only on the will of the government and its ability to achieve improvements in the medium term. The success is also affected by what other countries are doing in this area.

These five considerations strengthen us in the opinion that the budget crisis is very significant for a number of sectors and markets. However, so far many consider it as a local, temporary and reversible phenomenon. All this leads to the sixth and last consideration.

6. Most likely, the scale of budget problems will be recognized by the authorities and the private sector with a fatal delay. Unfortunately, typical game schemes do not help in the economy regarding system shifts. Many experts are trying to explain what is happening with the help of obsolete analytical models that only lead from understanding the systemic nature of new phenomena.

The following difficulty arises here. To realize the problem in a timely manner is very important, but not enough. It is necessary to find the right solution. As history shows, governments and companies are difficult to part with old templates.

What conclusions can be extracted? I believe that the significance of the budget crisis in developed countries is not yet sufficiently evaluated and recognized. Perhaps over time we will see what important consequences it leads to. The sooner we realize this, the higher the likelihood that this crisis will be able to survive without loss.

Author - CEO of the Pimco investment company

Translated by Anna Razintseva

Original material