27 Sep 2016

Emerging Market Debt

via @IIF [Institute of International Finance] on Twitter today
"[Emerging Market] non-financial corporate indebtedness rose more than $1.6 trillion in H1 2016, surpassing $26 trillion"

The report this comes from is available to members only.

Note that corporate Saudi Arabia is currently accruing large amounts of debt. Not sure what is going on there!

A brief recap on what happens when the private sector gets over indebted. Business changes its behaviour from maximising profit to minimising debt. Rather than investing in growth, business seeks to minimise their interest payments. It's really the only rational thing to do. But it results in an economic slow down. Richard Koo calls this a balance sheet recession. He explains it well in this short video.


25 Sep 2016

Private Debt

A chap called Richard Vague seems to know what he is talking about when it comes to private debt. His essay in Democracy, A Journal of Ideas is called The Private Debt Crisis and comes with the strapline: "China is drowning in it. The whole world has too much of it. History suggests: This won’t end well." The essay is reprinted in Evonomics where it is called How to Suffocate Your Economy: Drown it in Massive Private Debt.

The essay looks mainly at USA private debt, but the remarks are salient to any economy. When your consumers have large aggregate debts the interest payments become a significant proportion of income and they become reluctant to spend. We get slowdown in demand, which ripples through the economy and undermines growth.
"a growing body of research suggests that when private debt enters the range of 100 to 150 percent of GDP, it impedes economic growth."
Vague points out that high levels of private debt also makes consumers and businesses unwilling to borrow more. Borrowing for investment is a fundamental principle of the capitalist economy. I would point out that, until the modern era, this is how banks made their money. Now of course, banks make 90% of their money by speculating on asset and commodity prices and derivatives.

The essay also looks at the situation in China where private debt has been growing rapidly and seems likely to be the next flash point in the global economy. That much private debt accumulated that quickly, cannot help but cause problems.

The essay finishes with some ideas on how to alleviate the problems caused by private debt. This blog is inspired by Steve Keen's idea of the modern debt jubilee (government gives money to consumers instead of banks, with the proviso that they must pay down debt before spending).

What the essay does not do is address the fundamental problem that leads to very high levels of private debt and repeated economic crisis. The actions of governments in the 1970s and 1980s who stripped away of regulation designed to prevent exactly this ought to come under scrutiny. We know how to prevent this happening.

2 Sep 2016

General Equilibrium Theory - Still Dead.

Ackerman, Frank. (2002). Still dead after all these years: interpreting the failure of general equilibrium theory. Journal of Economic Methodology 9:2, 119-139.
http://www.ase.tufts.edu/gdae/Pubs/rp/StillDead02.pdf


Abstract

More than 25 years after the discovery that the equilibrium point of a general equilibrium model is not necessarily either unique or stable, there is still a need for an intuitively comprehensible explanation of the reasons for this discovery. Recent accounts identify two causes of the ending of instability: the inherent difficulties of aggregation, and the individualistic model of consumer behaviour. The mathematical dead end reached by general equilibrium analysis is not due to obscure or esoteric aspects of the model, but rather arises from intentional design features, present in neoclassical theory since its beginnings. Modification of economic theory to overcome these underlying problems will require a new model of consumer choice, non-linear analyses of social interactions, and recognition of the central role of institutional and social constraints.

Via General equilibrium theory — still dead after all these years, blog post by Lars P Syll.