Debt

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(No Transcript)
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Debt Deficits Credit Surpluses

• Debt and Credit cumulative stock variables
• relationship
• debtors and creditors "joined at the hip"
  (Atwood)
• debt topic of discomfort
• allegedly greater discomfort in some cultures
• eg Germany versus English-speaking countries
• debt topic of confusion
• country's debt national debt public debt
• Deficits (D) and Surpluses (S) flow variables
• accounting identity total surpluses total
  deficits (SD)
• S (-D) 0 sum of all sectoral balances
  equals zero
• a deficit is an addition to debt or a reduction
  of credit

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Sectors

• Global Economy
• governments (public) and others (private)
• private includes corporate and household
• two sectors one degree of freedom
• private sector balance negative of government
  surpluses
• global government sector almost always in deficit
• see next slide for 2001 to 2010 global balances
• interpretation
• economists commonly think of 'crowding out'
• implies autonomous government accommodating
  private sector
• untenable interpretation post 2008
• governments have 'intelligence' to accommodate
• called counter-cyclical fiscal policy

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Global Intersectoral Balances
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Sectors

• National Economy
• Foreign sector Government sector Private sector
• two degrees of freedom
• foreign balance is negative of current account
  balance
• example profiles Japan, USA, UK and Germany
• possible for some countries to have positive G
  and P
• but not all !
• such, if long term, would be an ideal
  'mercantilist' position
• Australasia New Zealand and Australia
• commonly classed as debtor-deficit economies,
  like USA
• Nordic Countries Sweden, Norway, Denmark,
  Finland, Iceland

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Japan
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United States
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United Kingdom
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Germany
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Profiles Aust-NZ vs. Nordics

• Similar profiles in 1980s
• common themes
• pre-1980s financial 'repression'
• rapid finance-sector liberalisation
• Australia least rapid liberaliser
• financial liberalisation
• rapid emergence of negative private-sector
  balances
• government appears to have crowded out private
  sector in New Zealand in mid-1980s
• substantial financial flow to these private
  sectors after 1987 in countries with lesser
  sharemarket crashes banking crises c.1990
• Contrasting profiles after about 1992

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Australia
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Sweden
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Denmark
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Norway
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New Zealand
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Finland
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Iceland
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Iceland
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Extended Profiles since 1992

• Nordic Countries
• especially Sweden, Denmark, Finland
• mercantilist 'creditor-surplus' profile
• Sweden
• banks rescued in government equity bail-outs
• governments and private sector pursue austerity
• strategies accommodated by foreign sector
• like Malaysia (especially) after Asian 1997/98
  crisis
• Australasia
• especially New Zealand
• debtor-deficit private-sector profile
• no sign yet of Scandinavian-style crises despite
  profile
• accommodates foreign surpluses via monetary-policy

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Malaysia
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Global Financial Crisis 2008-10

• "Balance-sheet recession" (Koo)
• autonomous private sector surpluses in corporate
  and household sectors, through debt-reduction
  andopen-mouth policy accentuating precautionary
  saving
• fiscal policy, not zero interest rates,
  accommodate
• accentuated post-'92 pattern in creditor-surplus
  countries
• reversal in most debtor-deficit economies, incl.
  Aust.-NZ
• Post GFC echoes of 1920s?
• return to profiles of last 20 years creates
  short-run global stabilisation but accentuates
  long-run financial imbalance
• fewer sectors or sub-sectors willing/able to
  accommodate increased global preference for
  private surplus balances