Burgeoning debt was not an unlucky accident. It is fundamental to the way the growth model works, and we have arrived at the stage, probably described most imaginatively by Hyman Minsky in his work on balance sheets, in which the system requires an acceleration in credit growth simply to maintain existing levels of economic activity. China’s debt problems, in other words, cannot be resolved administratively, by fixing the shadow banking system, by imposing discipline on borrowers, or indeed by eliminating financial repression (much of which, by the way, has already been squeezed out of the system by lower nominal GDP growth). Without a massive transfer of wealth from the state sector to the household sector it will be impossible, I would argue, for GDP growth rates of anything above 3-4% – and perhaps even less – to occur without a further unsustainable increase in debt, whether that increase occurs inside or outside the formal banking system and whether or not discipline has been imposed on borrowers.
Tag: loss socialisation
It’s not fashionable to be optimistic about Europe. But I have been a Europe bull since last April when we moved from the front-loaded austerity paradigm to a backloaded paradigm. And beginning in June 2013, I saw the data moving in that direction. Now the data now fully support this stance. But that’s the cyclical view. What about the macro secular story? Here the story is a bit more murky as it involves loss socialization, the continuing bank – sovereign nexus, and huge government debt burdens without the central bank backstop of a sovereign currency issuer.
I got a lot of feedback from my January 5 blog entry because of my argument that the implementation of the reforms proposed in the Third Plenum all but guarantees that growth rates in China will slow down. For that reason I thought it might make sense for me to explain a little more carefully why I think this must happen, and why I think that we can almost judge how successfully the reforms are implemented by how quickly growth slows.
By Willem Buiter This post first appeared on Vox Fiscal sustainability has become a hot topic as a result of the European sovereign debt crisis, but it matters in normal times, too. This column argues that financial sector reforms are essential to ensure fiscal sustainability in the future. Although emerging market reforms undertaken in the aftermath of the financial crises […]
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.
Earlier in the week, ECB German board member Jörg Asmussen delivered a speech on the challenges of the economic crisis for countries in Central and Eastern Europe. The part which caught most people’s eyes was his commentary on Latvia and its use of austerity as an economic model for the euro zone. Latvia really is not the model though. I have covered this ground before. However, I would like to re-visit it due to some numbers coming out of Ireland, the country I believe is most similar to Latvia within the euro zone.
Here is the video of an interview I did with Max Keiser on the situation in Europe. A lot of our discussion revolves around why the Germans actually do want a cohesive Europe but feel compelled to pursue the present policy path. We also discuss the advancing plan bail-in plans in Europe and the advent of wealth taxes as a talking point in the crisis.
The European Union is an existential crisis because its crowning achievement, the single currency, has come under assault from all sides. The continued existence of the Euro has even been called into question as country after country within the euro zone has been forced into bailouts and austerity. The heart of the problem is, as elsewhere in the industrialized world, stems from the unseemly growth in private credit that preceded the financial crisis in 2008 and the private debt overhang that accompanied that credit growth, even in the aftermath of extensive asset price deflation. Put simply, many private sector households and businesses across the industrialized world are upside down, in negative equity, bust by common definitions of balance sheet solvency. And the result has been and continues to be crisis.
Why does the federal government need to balance its books? Where does the money come from that the government spends? Whose income gets cut when spending gets cut? These are a few of the questions we should be asking when thinking about cutting or raising taxes. My view is that government deficits should be economically endogenous, meaning that they are the outcome that results from private sector savings and investment decisions and public sector policy choices. The deficit is not a goal. Making it a goal of policy makes policy an endogenous variable and brings uncertainty and pro-cyclicality into the business cycle.
The continuing attempts to rescue the financial sector (especially in the United States) have laid bare the tremendous social costs created by the way finance dominates the economy. If anything, the various bailouts have actually strengthened the hands of the financial sector, increasing concentration in a small number of behemoth institutions that appear to control government policy. Meanwhile the “real” economy suffers, as unemployment, poverty, and homelessness rise, but policymakers claim we cannot afford to deal with these problems. Their only hope is to gently prod Wall Street to lend more—in other words, to bury the rest of the economy under even more debt. The rescue of Wall Street displaces other fiscal policy that would lead to recovery.
What I am arguing is that the financial sector has not been operating like a neoclassical market. In spite of the rhetoric that deregulation improved efficiencies by replacing government rules with market discipline, markets have not and cannot discipline financial institutions.
Liberalizing interest rates means that those sectors of the economy who have benefitted from very low lending rates – SOEs, local and municipal governments, real estate developers, and other large borrowers – are likely to find many reasons to oppose interest rate liberalization. Likewise corporate governance reform is also likely to be opposed by a number of very powerful interests. So how will banking reform in China turn out? In the long run everything must balance, and one way or another financially repressed interest rates must adjust.
The EZ rescue strategy adopted in May 2010 failed to restore debt sustainability, avoid contagion, or reduce moral hazard. This column argues that a volte face is needed. The debt of Greece, Portugal and Italy – and perhaps Ireland, Spain and France as well – must be restructured to restore growth and end the crisis. All EZ nations should pay since their leaders’ decision to violate the Maastricht Treaty’s no-bail out clause is what brought us here.