Major advanced economies have made mixed progress in repairing the private sector’s balance sheets. This column explores private sector deleveraging trends and calls for a set of policies that will return debt to safer levels. Monetary policies should support private sector deleveraging and policymakers should not ignore the positive impact of debt restructuring and write-offs on non-performing loans.
The last post was an attempt to describe a reasonable worse case scenario for the US real economy as relatively benign compared to 1937, a comparison making the rounds these days due to a piece by Bridgewater’s Ray Dalio. My point is that 1937 is not a good comparison to 2015 in terms of the severity of possible real economy outcomes. Better comparisons are 1997 Japan or 1994 America. But on the other hand, in terms of market outcomes, I believe the severity of a potential decline is large. Some thoughts below
The title of this post is a bit alarmist. But what I intend to write is more about reasonable worst case economic scenarios that the Fed is looking to avoid. While a 1937-style downdraft is something to consider down the line, in the medium-term the question revolves more around the Fed tightening into weakness that is exacerbated by turmoil abroad. I am not unduly concerned about another 2008-style collapse. However, I do want to point out where I think the limited downside is for 2015.
The world has not yet begun to deleverage its crisis-linked borrowing. Global debt-to-GDP is breaking new highs in ways that hinder recovery in mature economies and threaten new crisis in emerging nations – especially China. This column introduces the latest Geneva Report on the World Economy. It argues that the policy path to less volatile debt dynamics is a narrow one, and it is already clear that developed economies must expect prolonged low growth or another crisis along the way.
The conclusion of the recently released Geneva report is that debt is the Achilles heel of this cyclical recovery. The Geneva economists warn that, despite the widespread belief that a general deleveraging has occurred due to the Great Financial crisis, in reality debt levels are higher today on a global basis than they were when the crisis began. They, rightly, worry that this debt will precipitate another global economic crisis. Some thoughts below
This post is on the same topic of the US economy that I addressed yesterday. But I want to go a bit deeper and add more colour to my comments. Signs that the US economy’s cyclical outlook are improving are getting ever more numerous, especially when we look at the […]
The economic and business paradigm in place in the United States is predicated on a secular increase in household debt that I believe will not last through another cyclical downturn without serious deleveraging. The reason we saw deleveraging during this past downturn was because we are now at a point where the secular increase in household debt has become unsustainable. Some thoughts below
The latest flow of funds data from the US Federal Reserve show that the great American household deleveraging may be over. This should add a credit accelerator to the US economy which maintains growth. Meanwhile analysts are increasingly optimistic about US and global economic fortunes. Data points and analysis follow.
Private and public debt in the Eurozone increased since the 2000s, and especially so in certain countries. This column presents evidence that high levels of private and public debt, together with deleveraging of all sectors, are especially harmful for economic growth. Private sector debt is more detrimental to growth than public sector debt. Therefore, policies aimed at reducing the private debt could yield important benefits.
I spoke at a Euromoney conference on inflation-linked products last year. My thesis at the time that deflation is the real problem and that inflation isn’t going to be a concern – which has largely proved right – was out of step with most people at the conference. I still believe this is the case. And as I prepare to attend this year’s conference on the same topics, I have begun to think again about the deflation and inflation issues. This post on how the US becomes the next Japan is an outgrowth of that thinking.
Economic growth is good. But what we want to see is job and wage growth to complement the asset-price growth. Without this catch up on the job and income front, the economy is on an unsustainable course.
This is just a quick follow-up to the last post on debt deflationary dynamics in Europe and the contrast to policy in Japan. I think Yanis Varoufakis has it right that Europe is on the same path as Japan but just not as far along the path. And I would say the same is largely true of the United States.