Debt Overhang and Secular Stagnation Adair Turner Senior Fellow Institute for New Economic Thinking Cass Business School London, 25 th March 2015 www.ineteconomics.org 300 Park Avenue South, New York, NY 10010 | 22 Park Street, London W1K 2JB
IMF Medium term growth projections Fall 2011 Spring 2012 Fall 2012 Spring 2013 Fall 2013 Spring 2014 6 4 2 0 Advanced Economies Emerging Market & World developing countries Source: IMF World Economic Outlook, October 2014 1
100 150 200 250 300 350 400 December 20112 – December 2014 US Payroll employment monthly increases 50 0 % 2012-01 2012-02 2012-03 2012-04 2012-05 2012-06 2012-07 2012-08 2012-09 2012-10 2012-11 Source: US Bureau of Labor Statistics 2012-12 2013-01 2013-02 2013-03 2013-04 2013-05 2013-06 2013-07 2013-08 2013-09 2013-10 2013-11 2013-12 2014-01 2014-02 2014-03 2014-04 2014-05 2014-06 2014-07 2014-08 2014-09 2014-10 2014-11 2014-12 2
Nominal yield on 10-year Government Bonds 3.5 3.0 2.5 2.0 % monthly 1.5 USA 1.0 UK Germany 0.5 Japan 0.0 2014-04-01 2014-05-01 2014-06-01 2014-07-01 2014-08-01 2014-09-01 2014-10-01 2014-11-01 2014-12-01 2015-01-01 2015-02-01 2015-03-01 Source: Federal Reserve Bank of St. Louis and IMF data 3
Consensus commentary still fails to reflect how deep are the deflationary pressures created by Debt overhang and deleveraging Long-term secular trends 4
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 5
Share of real estate lending in total bank lending 0.7 70% 0.6 Ratio of real estate lending to total lending 60% 0.5 50% 0.4 40% 0.3 30% 0.2 20% 0.1 10% 0 1880 1890 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010 Source: The Great Mortgaging, Professor Alan Taylor, University of California, Davis 6
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 7
Credit extension and house prices Household debt as a % of GDP 2000 – 2007 House prices 2000 – 2007 250 120 100 200 Index: 2000 = 100 80 150 % GDP 60 100 40 50 20 0 0 Q1 2000 Q1 2001 Q1 2002 Q1 2003 Q1 2004 Q1 2005 Q1 2006 Q1 2007 Q1 2000 Q1 2001 Q1 2002 Q1 2003 Q1 2004 Q1 2005 Q1 2006 Q1 2007 US UK Spain Ireland Spain US UK Ireland Source: Ministry of Housing (Spain), S&P (US), DCLG Source : BEA; ONS; ECB 8
Credit and asset price cycles: downswing Less credit extended Reduced Restricted lender Falling asset borrower supply of credit prices demand for credit Expectation of future asset price falls Cautious assessments of credit risk High credit losses: low bank profits • Confidence dented • Reduced capital base 9
Sectoral financial surpluses/deficits as % of GDP: Japan 1990 – 2012 10 5 0 % -5 -10 -15 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 PNFCs Government Source: IMF, Bank of Japan Flow of Funds Accounts 10
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 11
Shifting leverage: Private and public debt-to-GDP 12 12
Developed economies – Debt to GDP Household Non-financial Corp Public 110 95 % GDP 80 65 50 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Source: Geneva Report No 16 Deleveraging, What Deleveraging? ICMB / CEPR September 2014 13
Global debt excluding financials Emerging Markets 280 Developed Markets World 260 240 220 % of GDP 200 180 160 140 120 100 01 02 03 04 05 06 07 08 09 10 11 12 13 Source: Geneva Report No 16 Deleveraging, What Deleveraging? ICMB / CEPR September 2014 14
Emerging markets: total debt as % of GDP (excluding financial sector debt) 240 China China Series1 Series2 Series3 Series4 Series5 Emerging Markets 220 India Brazil 200 Turkey 180 160 140 120 100 80 60 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 1 2 3 4 5 6 7 8 9 10 11 12 13 Source: Deleveraging, What deleveraging , The Geneva Report, 2014 15
China: debt as % of GDP 282 Financial institutions 65 158 125 Non-Financial corporations 24 72 Households 38 20 Government 55 42 2007 2014 Q2 Total debt ($tr) 7.4 28.2 Source: McKinsey Global Institute 16
China’s debt exposure to property $ trillion 8.5-9.5 2.2 2-2.5 2.5-3 1.8 Household Real estate Real estate Government Total exposure related to property As % of total non- 8 10-15 10-15 10 40-45 financial debt Source: McKinsey Global Institute 17
Shifting leverage: Germany credit-driven growth 240 China 220 200 Spain 180 160 140 120 Germany 100 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Source: Deleveraging, What deleveraging , The Geneva Report, 2014 18
General Government primary deficit % of GDP, average 2008- 2013 7.2 US 6 UK Japan 7.8 Japa n Euroz Eurozone 1.6 one Source: International Monetary Fund Fiscal Monitor, October 2014 19
Nominal demand growth 2008 – 2014 Domestic Demand (GDP - Net Exports) 2008=100 130 120 Nominal GDP, 2008=100 110 UK UK 130 USA USA 100 Japan Japan 120 90 Eurozone Eurozone 110 80 70 100 2008 2009 2010 2011 2012 2013 90 Net Exports as % of GDP 80 4 3 70 2 2008 2009 2010 2011 2012 2013 2014 1 UK 0 USA 2008 2009 2010 2011 2012 2013 -1 Japan Sources: (IMF WEO, WB WDI) -2 Eurozone -3 -4 -5 -6 20
Raising actual and potential growth must remain a priority. In advanced economies, this will require continued support from monetary policy IMF World Economic Outlook October 2014 The extended period of monetary accommodation and the accompanying search for yields are leading to credit mispricing and asset IMF price pressures, and increasing the Global Financial Stability Review chance that financial stability risks October 2014 could derail the recovery. 21
Shifting leverage: back to private again UK Household gross debt as % of UK Public net debt as % of income: 2009 - 2020 GDP: 2009 - 2019 185 85 180 80 175 75 % Percent 170 70 165 65 160 60 155 55 150 50 145 45 140 40 2009Q1 2010Q1 2011Q1 2012Q1 2013Q1 2014Q1 2015Q1 2016Q1 2017Q1 2018Q1 2019Q1 2020Q1 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Source: Office of Budget Responsibility, Economic and Fiscal Outlook, December 2014 22
Exchange rate depreciation Yen and Euro versus US$ 105 100 95 90 85 Euro 80 Yen 75 70 January 2013 April June October January 2014 June October January 2105 April March Source: IMF data and statistics 23
Debt and demand in the debt overhang trap Debt does not go away: it simply shifts From private to public, and then back From one country to another Currency devaluations do not stimulate global demand: they shift demand From one country to another Demand can only be stimulated (rather than shifted) by: Fiscal deficits more public debt Domestic impact of ultra loose monetary policy more private debt 24
Global debt excluding financials Emerging Markets 280 Developed Markets World 260 240 220 % of GDP 200 180 160 140 120 100 01 02 03 04 05 06 07 08 09 10 11 12 13 Source: Geneva Report No 16 Deleveraging, What Deleveraging? ICMB / CEPR September 2014 25
Public debt to GDP: US and UK National debt as % of GDP 300 250 200 % GDP 150 100 50 0 1930 1935 1940 1945 1950 1955 1960 1965 1970 1975 1980 Source : DMO, ONS 26
Ensuring long-term Japan debt sustainability: IMF scenarios Required cyclical changes in adjusted primary balance % of GDP 2010 2014 2020 Continuous surplus November 2010 - 6.5 + 6.4 thereafter to reach Fiscal Monitor • 80% net debt • 200% gross debt October 2014 - 6.0 + 5.6 by 2030 Fiscal Monitor 27
Eurozone debt brake implications Requirement: reduce debt to GDP each year by 1/20 th of the excess over 60% of GDP Requires primary budget surpluses for 10+ years of: Spain 4% Ireland, Italy & Portugal 5% Greece 7% Source: Barry Eichengreen: The Bond Markets’ Dance , FT.com, 17 November 2014 28
Debt overhang: the unavoidable choice Debt write-off, Debt erosion default, via inflation, Debt restructuring monetisation Sustained slow Stimulating yet growth and low more credit deflation 29
Debt overhang and deleveraging Long-term secular trends 30
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