A Decade of Stagnation: Why? Adair Turner Chairman Institute for - PowerPoint PPT Presentation

Institute for New Economic Thinking A Decade of Stagnation: Why? Adair Turner Chairman Institute for New Economic Thinking INET Plenary Conference Edinburgh 21 st October 2017 ineteconomics.org | facebook.com/ineteconomics USA 300 Park Avenue South, 5th Floor, New York, NY 10010 | UK 22 Park Street, London W1K 2JB

GDP per capita growth 2007-16 % per annum Advanced economies Emerging Economies China 7.8 US 0.5 India 5.4 Japan 0.44 Russia 0.8 UK 0.2 Brazil 0.6 Eurozon 0.03 e Sub Saharan Africa 1.88 Institute for 1 New Economic Thinking

Successive market forecasts of BofE interest rates May 08 – Aug 17 6% 5% 4% Feb-10 Feb-11 Feb-09 3% Feb-14 2% Feb-12 Feb-15 Feb-13 1% Feb-17 Feb-16 Aug-17 0% 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Source: Resolution Foundation and Bank of England Inflation Report, August 2016 Institute for 2 New Economic Thinking

Sterling 10 year index-linked gilt: Yield to maturity 1985 – 2017 5 3.85 4 3.59 3 2.54 1.95 % 2 1.22 1 0 -0.62 -1 -1.5 -1.8 -2 1986-90 1991-95 1996-00 2001-05 2006-10 2011-15 Jun-16 Jun-17 Source: Bank of England Statistics Institute for 3 New Economic Thinking

Debt overhang Secular stagnation Institute for 4 New Economic Thinking

Private domestic credit as a % of GDP: Advanced economies 1950 – 2011 Source: Financial and Sovereign Debt Crises: Some Lessons Learned and Those Forgotten , C. Reinhart & K. Rogoff, 2013 Institute for 5 New Economic Thinking

Share of real estate lending in total bank lending 60% 50% 40% Percentage 30% 20% 10% Source: “ The Great Mortgaging”, Oscar Jordá, Moritz Schularick and Alan Taylor, 2014) Institute for 6 New Economic Thinking

Credit and asset price cycles: upswing Increased credit extended Increased Increased lender Increased borrower supply of credit asset prices demand for credit Expectation of future asset price increases Favourable assessments of credit risk Low credit losses: high bank profits • Confidence reinforced • Increased capital base Institute for 7 New Economic Thinking

Japanese government and corporate debt: 1990 – 2010 250 Bank lending to non-financial corporates General Government debt 200 150 % GDP 100 50 0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Source: BoJ Flow of Funds Accounts, IMF WEO database (April 2011), FSA calculations Institute for New Economic Thinking 8

Global debt continues to rise Debt as % of GDP 300 Households Non-financial Corporates General Government 250 200 150 100 50 0 AEs AES EMEs EMES ALL AEs AES EMEs EMES ALL AES AEs EMEs EMES ALL AEs AES EMES EMEs ALL End-2007 End-2010 End-2013 End-2016 Source: Bank for International Settlements 87 th Annual Report , 2017 Institute for 9 New Economic Thinking

Nominal GDP growth and fiscal balance 2007 – 2016 Growth of nominal Average fiscal deficit as % GDP % p.a. of GDP 2008-2016* 1.5 Eurozone 3.5 Eurozone 2.7 UK 6.5 UK 2.8 US 7.2 US (*) General government Balance, Table 1, IMF Fiscal Monitor, April 2017 Source: IMF World Economic Database, April 2017; IMF Fiscal Monitor, 2017 Institute for 10 New Economic Thinking

Debt overhang : the unavoidable choice? Sustained low growth and low Debt erosion via inflation – debt ultra low burdens never interest rates decline But leads to new debt creation Debt write-off, default and restructuring But has disruptive / depressive effect Institute for 11 New Economic Thinking

Debt overhang Secular stagnation Institute for 12 New Economic Thinking

Sterling 10 year index-linked gilt: Yield to maturity 1985 – 2017 5 3.85 4 3.59 3 2.54 1.95 % 2 1.22 1 0 -0.62 -1 -1.5 -1.8 -2 1986-90 1991-95 1996-00 2001-05 2006-10 2011-15 Jun-16 Jun-17 Source: Bank of England Statistics Institute for 13 New Economic Thinking

Why did real rates fall so much even before the crisis? Ex-ante savings Ex-ante investment Global imbalances? Reduced investment needs? In plant and machinery? • Inequality? In advanced economy • property and infrastructure? Demographic effects? Institute for 14 New Economic Thinking

Drivers of a falling neutral real rate? Developed economies Likely reversal 1990 ≈ 4% X Lower future growth -1.0% Demographic effects X -0.9% Higher inequality -0.45% X -0.25% Asian savings glut X Cheaper capital goods -0.5% X -0.2% Less public investment ? Rising spread -0.7% ? Unexplained -0.5% Today -0.5% Source: Lukasz Rachel and Thomas Smith, Secular Drivers of the Global Real Interest Rate, Bank of England Working Paper No. 571, December 2015 Institute for 15 New Economic Thinking

Advanced economy investment as % of GDP: 1986 – 2015 five-year averages 25.1 25 23.6 23.5 23 22.3 21.8 % 21 20.7 19 2001-05 2006-10 2011-15 1986-90 1991-95 1996-00 Source: IMF World Economic Outlook Database, April 2016 Institute for 16 New Economic Thinking

Wealth and employment in ICT businesses Market Value ($bn) Employees (000s) 447 (Sep 2016) ͠ 114,000 (Sep 2010 ) We have over 1 million users per 555 ͠ 67,000 engineer and this number has been steadily increasing 374 ͠ 14,500 1* ͠ 12 19* 55 With only 32 * Paid by Facebook engineers, one WhatsApp developer supports 14 million active users Institute for New Economic Thinking 17

Capital in France 1700 – 2010 800% Net foreign assets 700% Other domestic capital 600% Housing Agricultural land 500% % national income 400% 300% 200% 100% 0% 1700 1750 1780 1810 1850 1880 1910 1920 1950 1970 1990 2000 2010 Source: Capital in the Twenty First Century, T. Piketty (2013) Institute for 18 New Economic Thinking

Dynamics in the modern economy Falling need / Information and demand for communications capital goods technology Ultra loose Potentially deficient monetary demand policy Increased savings Low equilibrium Rising of rich real interest rates inequality Real wages Rising leverage among stagnant low-medium income Banks can create credit Rising demand for Rising W/Y ratio – + purchasing power - positional goods – primarily real estate easiest against real real estate estate Fundamental drivers of secular stagnation only offset by rising leverage Fundamental drivers of secular stagnation only offset by rising leverage Crisis and debt overhang Crisis and debt overhang Exacerbates secular stagnation problem Exacerbated secular stagnation problems Institute for 19 New Economic Thinking