THERE is a fascinating chapter in the IMF's World Economic Outlook, looking at past episodes of high government debt-to-GDP ratios. It finds 26 occurrences since 1875 where developed country governments had gross debt ratios of more than 100%, and focuses on six particular examples; the UK after World War 1, the US after World War 2, Belgium in the 1980s, Italy and Canada in the 1990s and Japan over the last 20 years. These countries had varying degrees of success in getting their ratios down.

The worst example, and one highlighted by Martin Wolf in the FT today, was that of the UK between the wars. Fiscal contraction (in part inspired by a newspaper campaign for a "war on waste") was accompanied by very tight monetary policy as the UK attempted to restore sterling to its pre-war parity with the dollar (and gold). The idea was that the country needed to return to an Edwardian golden era, in which sound money and small government prevailed (admiration of the pre-1914 ethos is a lingering cultural trait; see Downton Abbey). Tight fiscal policy, high real rates and an overvalued exchange rate were a disastrous combination; the UK economy barely grew and the debt burden rose until 1933.

Does the UK example mean we should take no fiscal action, as some suggest? Japan has run persistent fiscal deficits without generating significant growth; its debt-to-GDP ratio has persistently risen. Some would say that Japan's monetary policy has been too tight. Although it has run zero nominal interest rates and used quantitative easing, deflation has meant that real rates have been positive. The yen has also been strong.

Canada's example in the 1990s, after one failed effort to cut its debt in the 1980s, is instructive in a different way. It enjoyed low real rates and a gently declining exchange rate, but it also benefited hugely from the US boom; exports contributed an average 3 percentage points to GDP growth between 1993 and 2000. Belgium and Italy had varying success in their debt reduction programmes; the former benefiting from low interest rates, the latter managing to run many years of primary budget surpluses. But after all their efforts, debt ratios are still high.

The US was probably the ideal example as it was able to use financial repression to keep interest rates low after the war, and the underlying growth of the American economy was strong. The fiscal deficit disappeared as the country emerged from war. 

The IMF concludes that

fiscal consolidation efforts need to be complemented by measures that support growth; structural issues need to be addressed and monetary conditions need to be as supportive as possible.

Secondly, the IMF says that in successful cases

monetary easing also fostered exchange rate depreciation, which supported external demand and growth.

Thirdly the IMF says that

fiscal repair and debt reduction take time - with the exception of post-war episodes, primary deficits have not been quickly reversed.

On this point (and Britain's Ed Balls will be underlining this passage)

sustained improvements of more than 1 percentage point a year are rare, and this means that, when starting from a primary deficit, debt reduction takes a particularly long time

Finally, the IMF points out that

the external environment has been an important contributor to outcomes in the past. The implications for today are sobering - widespread fiscal consolidation efforts, deleveraging pressures from the private sector, adverse demographic trends, and the aftermath of the financial crisis are unlikely to provide (this) supportive external environment.

Exactly. There is a fallacy of composition problem here, in which everyone would like to cut their deficit, while hoping that a lower exchange rate will help them increase their export share, and thus prop up GDP growth. Of course the developed world could massively let its exchange rate fall relative to Asia, which could simultaneously go on a massive spending spree for Western consumer goods. To the extent this is happening (Asian current account balances have come down), it hasn't happened enough.

There are some issues that the IMF chapter might have discussed but didn't. In part, this flows from its findings, along with Reinhart and Rogoff, that high debt-to-GDP ratios are associated with low growth. But it also must be the case that high government debt ratios stem from persistent budget deficits, and these in tum imply a large role for the government in the economy. Does this make a difference to the effectiveness of fiscal stimulus? It seems intuitive that, whereas Eisenhower's building of the interstates made a long-term contribution to US growth, the measures adopted by the Japanese (concreting river beds etc) in the last 20 years have been less effective. Perhaps there are diseconomies of scale in government action.

Secondly, the IMF paper just uses numbers for government debt. But the examples of the last 20 years (Iceland, Ireland, Spain) shows that private sector (and particularly bank) debt is crucial, not least because it ends up on government balance sheets in the crisis. There was a lot less private sector debt before the liberalisation of financial markets in the 1970s and 1980s. Surely that is a factor.

Finally, the IMF concludes that this issue will take a long time to resolve. Back in 2010, when I wrote a debt survey in The Economist on this issue, I concluded that, in the absence of rapid growth, the options were "inflate, stagnate or default". The developed world has spent the last two years failing to confront this choice, and as a result has been heading down the stagnation route. In part, this is because there has been a reluctance to take the pain of default; in Greece, only the private sector was asked to take the strain. And as for QE, to the extent that it can work in the long run (rather than just propping up asset markets and confidence in the short run) this must surely be by inflating away the debt, or at the very least by the financial repression seen after the war. We may just be seeing, in the latest statements from Ben Bernanke and Mervyn King, a growing acceptance from central banks that inflation is the least worst way out of the mess.

The great doubt has always been whether central banks will be able to pull this off, or whether markets will push up nominal interest rates in horror. Of course, the great beauty of QE in this sense, is that central banks can just keep buying bonds and offset private sector sales. But you wouldn't want to be a small saver in this scenario.