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Archive for February, 2011

Is Keynes Dead?

February 28, 2011 1 comment

Literally, yes. But the ideas that Keynes produced, Keynesianism and derivatives of, are still alive albeit under-utilised.

The 2008 recession ushered in a new opportunity for Keynesianism, but the artificial demand was created in the sectors less deserving of the capital injection – namely the financial sector. This is not to suggest that the bank bail out was unnecessary, it was crucial in order to stop the systemic collapse of our economy and Quantitative Easing was a welcome opportunity for banks to begin recapitalisation.

The scrappage scheme was a cheap and effective way of boosting demand and output in a small section of manufacturing. This is a positive example of Keynesian theory in action.

However, with lots of problems in the society and economy, more could have been done to solve them. The first is housing, or severe lack of. The second is an ageing infrastructure. The third is an undiversified economy.

The theory behind Keynesianism is that the aggregate demand is artificially boosted by state spending, either from reserves or borrowing on the domestic and international markets. This is to supplement the fall in private investment due to the unpredictability of the economy caused by a recession or similar.

The first problem encountered in the economy is a lack of housing. This blog has posted a fair amount on housing with individual posts or short references to. There is a lack of housing in this country – affordable, for rent etc – and, arguably, the financial crisis which preceded the recession was born out of the bubble created by unsustainable housing prices. The first industry is suffer from the recession was construction. Billions should have been poured into the industry for the purpose of building houses en masse- alleviating the pressure on housing lists and the burden placed on the state in the form of housing benefit. It would have stabilised the housing market and produced jobs for the unemployed, increased aggregate demand and, as an added bonus, increased tax receipts! I call that a win/win situation.

The second problem is an ageing infrastructure. It is evident to everyone in this country that our infrastructure is not fit for purpose. A railway system that has not been largely updated since it was constructed in the nineteenth century. Airports that close at the lightest of snowfalls. A road system that has become congested. Telephone lines that are not fit for the digital age. Thankfully, steps were made to address some of these, however partial they were. The high-speed rail, initiated by Labour, has been taken on by the Coalition Government. The result of improving the infrastructure is increased aggregate demand, reduced unemployment and increased tax receipts with the option of leasing these infrastructure developments back to the private sector, thus creating another revenue stream. Win/win? It sure is!

The third problem of a lack of diversity in the economy can be simply solved by following the lessons of the scrappage scheme. State involvement can be minimal but the effects will be profound. The state provides the necessary capital investment and lets the private sector do its thing. This can be done in the new growth areas, such as renewable energy (also reduces overall long-term energy costs and secures our energy provision), knowledge economy (which includes Higher Education), etc. Needless to say it produces a win/win situation and creates a more stable, more diverse economy.

While these problems were not addressed properly by the previous Labour Government, and nor was Keynes invoked properly, there could very well be a situation where Keynesianism is needed and soon. It is fair to say that consumer demand has almost disappeared as consumer confidence has dropped rapidly. Before waiting for a double-dip recession or crisis on a similar scale it would be wise of the Coalition to start practising Keynesianism…

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Cameron’s Privatisation: Good, Bad or Misguided

February 22, 2011 Leave a comment

On Monday the Prime Minister, David Cameron, announced in the Daily Telegraph an outline to effectively privatise swathes of the public sector. A white paper will be released in the next two weeks allowing private companies the automatic right to bid for the provision of public services. This is not to say that the public sector will not be able to bid for these services as well. All public services, such as education, health, sanitation etc, will be open to the private sector for their provision.

This is not new. A lot of services provided for by local authorities, such as bin collection, are already outsourced to the private sector and because there is an asymmetrical flow of information, the provision for these services are a) expensive b) inefficient and c) unaccountable.

Education, through the Academy programme and now through the Free School  programme, has let the private sector in to educate our children. One could say “this is a terrible thing!” However, it is too early to decide either way, with regards to the Free Schools. The Academies have turned failing schools around they are now competing for the top spots in the league tables. Is competition such a bad thing? No, but not everyone thrives on competition. In fact, some people shy away from competition, so education needs to accommodate those of a non-competitive disposition and, especially, those outside the mainstream ie learning difficulties.

With the topic of the NHS, we are all in agreement that a health service, free at the point of use, serves to benefit us all. However, we do not spend enough, on a per capita basis, on healthcare. The Primary Care Trusts and Foundation Hospitals were the first step to introducing a market into the NHS. However this blog has already voiced concerns about the government’s proposals to hand 80% of the Healthcare Budget to GPs and they can be read here – NHS Reform: Privatisation?

From what we can gather, from the initial outline, accountability will be the main problem with Cameron’s proposals. This, as mentioned earlier, stems from an asymmetrical flow on information. In other words, unless companies bidding for these services disclose everything, the market is weighted in favour of the private provider rather than it being a neutral transaction. It would be advisable if the white paper included mechanisms to create a symmetrical flow of information. This will, hopefully, drive prices down, standards up and be more accountable than the services, whether publicly or privately provided, currently are.

 

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Hyperinflation is the course of action

February 18, 2011 3 comments

This is a controversial statement and I speak for myself, not this blog.

Many people have a fear of inflation, which means that hyperinflation is beyond their comprehension. Under normal circumstances, I too would be fearing inflation. However, these are not ordinary circumstances.

We have just come out of a recession, and we might be going back into one too, debt levels are at a record high! The recovery is weak, in fact it’s almost non-existent.

Inflation is currently 4% – relatively high compared to what has been experienced in the recent past. The Bank of England base rate is 0.5%, the lowest it will ever be and the longest it has ever been held so low. The average credit card interest rate is 18.9%, the average mortgage interest rate is 3% and the average loan is 9.2%.

Household debt levels are at a record high, having breached the £1 trillion mark around the beginning of the year. Corporate debt levels are not that far behind.

Inflation, theoretically, eats into the debt. So to adjust for inflation, credit card interest rates are 14.9%, mortgages are -1% and loans 5.2%. So the people that benefit from the current inflation rate are homeowners.

Because of the high levels of debt and the high interest charged on the debt, I advocate hyperinflation of 100% or more. This means that debt will effectively be wiped out within a year and we can rebalance and restructure the economy. Suffer a temporary hardship now in order to enjoy lasting prosperity and stability at a future date.

Categories: Uncategorized

Youth Unemployment and the National Minimum Wage

February 17, 2011 1 comment

The Adam Smith Institute has recently created a ‘shit storm’ by advocating the abolishment of the National Minimum Wage. I’m going to be controversial and say that the Adam Smith Institute is theoretically correct in its advocacy.

In a perfectly free society with a perfectly free market, there is no need for wage protection, or in fact any protection. Therefore the NMW is not needed. However, we do not live in a perfectly free society, nor do we have a perfectly free market. Therefore labour protection is necessary to counter the exploitative practices that spring up from an imperfect society and market.
Now, proponents of the free market will say here that the market doesn’t exploit and the ‘guiding hand’ of the market will shelter the vulnerable. My retort to that: only in a perfect society and market.

The Adam Smith Institute’s research was into how the NMW should be abolished to reduce youth unemployment. Since the NMW was introduced 10 years ago, Youth Unemployment has been stubbornly high. The Institute attribute the unemployment to the NMW. NMW does have a role to play. However, there is a systemic problem with has resulted in a high youth unemployment rate.

The first problem: education. Education in this country is not ideal for supplying the labour market. The courses are either too academic, too practical or neither. In short, education fails the labour market and thus students.

The second problem: high debt levels.
Businesses are not going to hire if they have a high debt burden, nor are those occupied in the labour market willing to sell their labour because of the unpredictability of the market and their own debt burden.

The third problem: lack of diversity.
The economy is lacking in diversity. The largest contributor to GDP, the financial sector, whilst being capital intensive is not labour intensive. Manufacturing, on the other hand, is labour intensive yet also a smaller contributor to the economy.

The NMW does impose a barrier to entry, yet in the grand scheme of things it only plays a tiny part.

Categories: Uncategorized

The Revolution in Egypt

February 16, 2011 Leave a comment

As this is my first post I would like to start by expressing my thanks to my learned friend Mr Oldfield and to Mr Pike for this opportunity to post meaningful commentary and to be part of such a prodigious project.

I would like to start with a short introduction. I hold a Masters degree in Middle East Politics with Merit from the University of Exeter and a 1st class honours degree from the University Of Wales Institute Cardiff (UWIC) in Modern History and Politics. I have studied a variety of topics and haven’t specialised in a certain topic, but have mainly studied British, US and Middle East history and politics. Therefore I have been given the remit of foreign affairs for this project. I am also the author of the 2010 Lambert Academic Publishing book: ‘Oman and Britain: Oman’s Changing Military Relationship with Britain: Dependence or special relationship?’, available here: http://www.amazon.co.uk/Oman-Britain-Relationship-Dependence-relationship/dp/3843362734/ref=sr_1_1?ie=UTF8&qid=1297120254&sr=8-1

Egypt

Now is one of the most interesting and exciting times to be looking at the Middle East Region, with the regime change in Tunisia, the mass protests and regime change in Egypt and the smaller scale demonstrations in Jordan, Iran, Yemen and Algeria. In this vein I thought I would offer a mix of academic considerations and observations from my October 2010 visit on the situation in Egypt. These are my own thoughts and understanding only.

Some Background

Why are the events of January and February 2011 so important in Egypt? Those unaware of the circumstances of Egypt’s history and politics could well be asking why these protests are so significant. The reasoning behind this significance lies in the nature of the Egyptian regime. Since the overthrow of the Egyptian monarchy in the 1950s by Gamal Abdel Nasser, Egypt has been dominated by the army and authoritarian rule. From the 1950s to the present day Egypt has lived under a dictatorship under three separate leaders – Gamal Abdel Nasser, Anwar Sadat and, for the last 30 years, Hosni Mubarak. These regimes established their own power bases by a mixture of carrot and stick. Under Nasser for example, Egypt initially prospered and Nasser gained status all over the Arab world for outfoxing the Western powers and Israel during the Suez crisis. This gave Nasser incredible popularity and his own cult of personality. This was coupled by a brutal coercive system with freedom of speech limited and a brutal, effective secret police. To a large extent this internal situation continued during Sadat and Mubarak’s rules. Sadat however, initially ruling in the same manner by attempting to lead the Arab world with the Yom Kippur war, was forced into a corner. His army surrounded on the Sinai and his country bankrupt, he was forced to make not only a cease fire with Israel, but peace. This benefited his country in two ways, he was able to reduce spending on the armed forces, and it gained him a substantial subsidy from the US. This made Egypt much more pro-Western, but this was a decision that cost Sadat his life, when he was assassinated in 1981 by anti-Israeli elements. This brought to power Mubarak, himself a former general. Due to the nature of his accession to power it was necessary to increasingly crack down on opposition. The Muslim Brotherhood was banned, press freedoms were limited and the sham democracy that was practised was increasingly difficult for opposition groups to be elected. Every time opposition groups looked to gain some sort of toehold in the parliament, the law was changed to exclude them. This was coupled with a ruthless security apparatus that frequently arrested without trial, brutally tortured opponents and ransacked opposition offices. In these circumstances any sort of formal protest was unthinkable. This led to less formal methods of protest, for example there is a fascinating anthropology article on the use of political jokes as a form of political protest in Egypt.

Why Protests Now?

A simplistic explanation as to why the protests have occurred in Egypt is to trace them to the events in Tunisia. A simplistic reasoning would be to suggest that Egyptians saw the events in Tunisia and realised they also could bring down their government. There is some truth in this but it does not provide a full enough explanation. To me, the protests are all about identity.

The Egypt that I visited in October 2010 was a shock to me. It was not the Egypt that I had read about and studied. I found the country to be poor and suffering. The Egypt as the leader of the Arab world and as the cultural and historic Mecca (as in hub, not the city) of the Middle East was nowhere to be seen. Instead I saw an Egypt desperately trying to survive and wholly dependent on its tourism industry. In Cairo, the streets were strewn with rubbish and dust and wholly engulfed in swarms upon swarms of what seemed to us to be unfinished tower blocks. These were vast slabs of the cheapest concrete slapped together, with no colour and no windows. If this was part of the building process, you wouldn’t bat an eyelid, but there were people living in these structures. Living in these hollowed out blocks with no windows and jammed in like sardines. If you thought the tower blocks of London or Sheffield were bad, you would be astonished by the squalor of these buildings. These structures stretched in every direction as far as the eye could see, with seemingly no end. Cairo, a vast metropolis unlike no other. The story does not end there. Whilst sitting in Cairo airport, I stumbled across an English language newspaper and one of its stories was shocking to a well off Westerner like myself. It was an article stating that due to the rising cost of food, most households could no longer afford vegetables and were having to eat rice and rusk and other cheap staples. We later found out that a well to do shopkeeper in Luxor said that his salary was something like 2000 Egyptian pounds a month, or £250 and this was one of the richer people. Egypt has an incredible “us” and “them” situation, with the well off not wanting to be associated with the poor and even encouraging tourists to not buy their products (on several occasions we were whisked past market stalls by tour guides with them telling us cock and bull stories about the poor quality of the goods and aggressive hassle. In Khan al-Kalili bazaar in Cairo, we were even accompanied by a security guard and were hurried on anytime we stopped to look at anything.) Added to this we found a undercurrent of dissent and dissatisfaction. A Christian shopkeeper in Sharm el-Sheikh, a well educated man, expressed to us his upset that he could not get safe drinking water except in the big cities of Cairo and Aswan. He also said that he was disappointed with the standard of healthcare on offer in his country. Another man in Luxor expressed the difficulty in getting overseas travel visas and how infrequently Egyptians travelled outside the country or, even, went on holiday in their own country.

This anecdotal evidence helps me to prepare my point, identity. Egypt it is clear sees itself as the leader of the Arab, Islamic (although it has a sizeable, about 20%, Christian minority) and African worlds as the place where they all meet. A tour guide expressed this very sentiment to me in Cairo after he found out I had studied Middle East Politics. He said to me, to learn about the Middle East this is where you need to be, this is the centre of the Middle East, forget Saudi Arabia or Iraq, Egypt is the most important. This gives an important insight as to how Egyptians see their identity. They see themselves as at the forefront of the Middle East, the cultural, historical and political leader. Until recently debatably this was true. What seems to me however is that Egypt’s current poverty challenged the Egyptian’s perception of their identity, they had lost the pride in their country. We saw this when visiting the Egyptian Museum, a place of outstanding artefacts and history but filthy and poorly displayed. It can also be seen in the streets of Cairo, dusty, ill-repaired and littered with rubbish. Egyptians felt that the country wasn’t theirs anymore and felt they didn’t have the means to express it. This occurred to me on a dreary drive through wet Wiltshire last week, a drive I have been on a thousand times. Wherever I go, and for how long, whenever I come back to Wiltshire I will always feel that it is my home and part of my identity. In Egypt I feel they had felt that reality had differed from their perception of this identity.

The timing of the protests does come down to Tunisia. Egyptians saw what was happening there and felt they could do the same, that it gave them the opportunity to get the freedoms they wanted to restore their identity. Also however I wonder if there was a bit of one-upmanship in that Egypt did not want to be seen to be outdone by Tunisia, as it saw itself as the leader of the Arab world and therefore in this vein the protests happened both to restore and because of Egypt’s identity.

The Nature of the protests

It is clear the protests were popular in nature and not designed to advance a religious or any other form of agenda. As a friend of mine who is an expert on Iran commented on my question about the  continuity between the Egyptian and Iranian revolutions there is a large difference between them. Whilst both to an extent were popular revolutions with many different aspects, the Iranian revolution had a larger religious flavour with people dressing up as martyrs and Allahu Akbar (God is the greatest) being a slogan for change. In Egypt it is remarkable that the people who took part in the demonstrations were often young and remarkably few were in religious or traditional dress. This is especially surprising as despite Egypt’s pro-Western orientation, the scene greeting one at Cairo airport is an amalgam of traditional Islamic dress (hijab, head scarf etc) for women, traditional Arab dress for men and modern Western dress such as suits. It is mainly but not exclusively older people in the traditional dress and younger people in the Western garb. Furthermore it is clear from youtube videos and statements from demonstrators that this was intended to be a revolution for all.

This gives an indication of who took part in the revolution. It was mainly the younger populace of Egypt who were not content to have their identity of Egypt challenged and hadn’t got stuck in a rut like the older people. For me, getting rid of Mubarak was clearly a key aim of the revolution, but the revolution was also about regaining a sense of community, a sense of identity and a sense of belonging. The proof for this is the fact that Egyptian were seen cleaning the streets of Cairo (anyone who has been there will tell you how dirty the streets usually are) as they finally felt they had reclaimed the city, and by extrapolation the country, for themselves. The revolution then was not an Islamic one, but one designed to be a people’s revolution, to reclaim the country for the people (the essence of which is democracy) and to reclaim a sense of Egypt for Egyptians. It is also clear that the demonstrators had to get rid of Mubarak both to do this and to ensure their objectives of democracy were met. This was both due to a mistrust of his government and to avoid what Brumberg called “the trap of liberalised autocracy” in which a regime grants limited liberalisation which actually increases its hold on power.

The West and Israel

The West was caught in a quandary with regards the situation in Egypt. Whilst it is clear that Western governments supported the movement towards democracy (if they had not they would have been hypocrites of the highest degree) there was also the strong possibility of a new government not being in their favour. The reasoning for this is simple: Egypt and by inference Mubarak’s government were a key ally for the West in the Middle East, both as an ally of Israel and as an ally in the war against terror. At best the overthrow of Mubarak could lead to the establishment of a democratic government but there is no guarantee that this government will remain pro-Western. The Mossadeq incident in Iran provides a blueprint for this where a popularly supported leader was overthrown by MI6 and the CIA for nationalising Iran’s oil (a move definitely in the country’s favour). The worst case scenario was/is a civil war for power. In short the question (to borrow from another friend) was of stability versus freedom. This can help explain the US’s rather watery statements that the Egyptian regime should grant concessions itself and Mubarak wouldn’t necessarily have to leave. Several American academics signed a petition to try and persuade the US government to put pressure on Mubarak to leave but without success, at least publicly. Several academics disagreed with this viewpoint in any case, such as Augustus Richard Norton who said on his blog that the fact of the matter was that the US is very tied up with Israel and needed Mubarak to help safeguard the alliance.

Why didn’t Mubarak leave earlier?

The answer to this isn’t clear but seems likely to be one of two things or a combination. It is possible that Mubarak through a form of the military industrial complex and an extreme arrogance felt that he was the only one able to lead Egypt successfully and the country would be lost without him. In this view Mubarak could have been acting from a perverse form of patriotism. Another view I have briefly considered but that seems unlikely is another patriotic view that Mubarak was acting as the only buffer to prevent the army from coming into power and that he was trying to protect the country. As the protestors seem to trust the army and due to the autocratic nature of his regime, this seems highly unlikely. The second possible explanation is that Mubarak was trying to weather the storm and that he expected by promising limited reforms, via the trap of liberalised autocracy to hold onto power in much the same way that has happened in a lot of the Gulf States. It is also possible that Mubarak meant to hold onto power in order to ensure the position for his son, Gamal.

What next?

On Friday came the news the protestors have been waiting for, Mubarak has gone and Egypt will have a new regime. It is also the case that in Mubarak’s cabinet reshuffle, much of the old guard has gone and been replaced, including Mubarak’s son, Gamal. In some rather pessimistic views this guarantees that the next leader will be a military one, as the only available civilian candidate has left. Another viewpoint suggests that the appointment of Omar Suleiman as Vice-President paves the way for Gamal to be appointed as the next leader as this was previously blocked by the old guard of the army, and Suleiman as an outsider did not hold these objections.

I think both of these views are incorrect. The army has for the minute taken over the country for the interim period but has pledged democratic elections, a referendum on a new constitution and to uphold Egypt’s international treaties. I think this is likely to happen and that the army will act as guarantors of democracy in much the same way as they do in Turkey. It is clear the people will not accept anything else and no matter how strong a security apparatus is it is impossible to hold a country by force alone indefinitely.

The biggest question and worry for the West is who will come to power. The biggest opposition group in Egypt has always been the Muslim Brotherhood (who are officially banned but were recognised in the recent Suleiman led peace talks, progress in itself) and as an organisation it is sceptical of democracy and would likely use democratic elections to establish an Islamic State. The problem is that the Muslim Brotherhood is not just a political opposition group but also a civil society organisation that has operated for many years like a charity, being the only organisation that has provided many people with food and basic amenities. Therefore the group is very popular and would stand a good chance of winning if it ran for election. The situation is very similar to what occurred in Gaza where Hamas, an anti-democratic group, was elected in a democratic election. Hamas’ position in Gaza has been enshrined by Israel’s blockade of it, establishing Hamas as the only group able to provide anything to the people creating a vicious circle.

There is good news however. The Muslim Brotherhood has announced it won’t run for the Presidency and doesn’t really have a strong enough leader to be able to do so in any case. Furthermore Egypt does have several prominent democratic candidates for the Presidency. Therefore I am optimistic that Egypt will become a democratic nation.

What does this mean for the region?

It is unlikely that a democratic government will renege on the peace with Israel as it brings in $2 billion annually in US aid but it may have to be stronger in its rhetoric against it, only time will tell.

What is clear is that the effect on the other autocratic regimes in the region will be massive. The peoples in the countries will see that it is possible to overthrow their regimes, even one as repressive and brutal as Mubarak’s and they will therefore demand freedom, or at least concessions. Egypt has once again reasserted itself as the leader of the region and will spread both a desire for and a sense of possibility of democracy throughout the region. This will cause issues for all of the regimes in the region and may result in other regime changes or at least freedom concessions. The Gulf states due to their rentier status may survive, but the non-rentier states will likely face unrest. This situation has already started with protests in Algeria, Jordan, Iran and Yemen. To put my optimistic head on, this could be the event and time that finally brings democracy and peace to the Middle East.

Categories: The Middle East

A 0.002% Tobin Tax to pay for TfL

February 7, 2011 1 comment

This project was requested by @LukeBozier.

The main difficulty with this report is that total financial transactions for the UK, and indeed the world, are undocumented. Therefore a lot of the report is based upon assumptions and pessimistic assumptions at that.

In 2008/9, global financial assets totalled $96.4 trillion. Because Britain has a large financial sector, I have assumed that it accounts for 20% of total assets or $19.28 trillion. We can further assume that transactions, of which will be taxed at 0.002%, account for 10% or $1.928 trillion. These are lower estimates, they might be more, but I doubt they’ll be less.

When the 0.002% tax is applied to the $1.928 trillion, the revenue is $3.856 billion or £2.39362 billion.

Total net expenditure for TfL in 2009/10, as a forecast, is £4.4bn. This means that by using the revenue from the tobin tax, TfL can be subsidised by nearly £2.4bn.

Categories: Uncategorized

Peak Debt

February 4, 2011 1 comment

Peak debt was briefly explored in a previous blog post: What do the GDP figures mean? In this post, I wish to explore Peak Debt more and offer a proper model for it.

What is Peak Debt

Well, it could be a theory seeing as the basis for it is Peak Oil, which is a theory slowly becoming an observation, but it is an observation with a theory attached to it.

Once the peak of the bell has been crossed, a contraction in consumption will be felt throughout the economy in order to service the debt. The contraction will begin in large structures – in order to balance the books – before it filters down. Once it hits the individual consumer, the contraction is sudden and sends shock-waves up the system, exacerbating the situation and repeating the process until debt is brought back to manageable levels.

Now to the theoretical part. It is cyclical as the rise to peak can take a long time and can collapse within years, this current cycle took almost 30 years to peak and 3-4 years to trough. Things will continue unless a thorough and exhaustive reform of the system and the culture takes place. The problem with this country is that individuals do not consider themselves in debt until they are £15,000 in it. The stark reality is that as soon as one borrows money, one is in debt. End of.

How do you calculate Peak Debt?

Peak debt relies on a debt threshold, which can be calculated using a debt-to-income ratio.

EXAMPLE

A debt-to-income (DTI) ratio consists of two DTIs x and y. x, or the front-end ratio, is the pecentage of income associated with living – rent, food etc. y, or the back-end ratio, is the percentage of income associated with living and any recurring debt payments. If we take a person on £12,000 pa and assume that x is equal to 28% and y is equal to 36% we can begin to calculate their debt threshold per month.

As you can see from the above illustration, the DTI is calculated and the total is subtracted from the income. This leaves the Threshold. With the Threshold, the higher the number the better. A 100% Threshold, though impossible, would mean that they could borrow 100% of their income and be OK. A 0% Threshold would mean they were insolvent. Another way to get to this point is to look at the back-end DTI, if it equals 100% they are insolvent, or nearing to it, as all their income is going on costs and debt repayments.

This can be applied to individuals and businesses. To apply this to a government is a lot more difficult as servicing debt for a government is a lot easier, considering the economic instruments available to them.


 

 

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