Debt Traps, Public and Private Adair Turner Chairman Institute for - - PowerPoint PPT Presentation

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Debt Traps, Public and Private Adair Turner Chairman Institute for - - PowerPoint PPT Presentation

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Institute for New Economic Thinking Debt Traps, Public and Private Adair Turner Chairman Institute for New Economic Thinking INET Plenary Conference Edinburgh 22 nd October 2017 ineteconomics.org | facebook.com/ineteconomics USA 300 Park

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Debt Traps, Public and Private

Adair Turner Chairman Institute for New Economic Thinking

INET Plenary Conference Edinburgh 22nd 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

Institute for

New Economic Thinking

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SLIDE 2

Institute for

New Economic Thinking

Private domestic credit as a % of GDP:

Advanced economies 1950 – 2011

1

Source: Financial and Sovereign Debt Crises: Some Lessons Learned and Those Forgotten, C. Reinhart & K. Rogoff, 2013

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SLIDE 3

Institute for

New Economic Thinking

Textbook descriptions of banks and bank lending

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Banks take deposits of money from savers and lend it to borrowers Banks lend money to ‘entrepreneurs/ businesses’, thus allocating funds between alternative investment projects

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SLIDE 4

Institute for

New Economic Thinking

Share of real estate lending in total bank lending

Source: “The Great Mortgaging”, Oscar Jordá, Moritz Schularick and Alan Taylor, 2014) 3 10% 20% 30% 40% 50% 60%

Percentage

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SLIDE 5

Institute for

New Economic Thinking

Japanese government and corporate debt: 1990 – 2010

50 100 150 200 250 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 Bank lending to non-financial corporates General Government debt

4 Source: BoJ Flow of Funds Accounts, IMF WEO database (April 2011), FSA calculations

% GDP

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SLIDE 6

Institute for

New Economic Thinking

Debt overhang : the unavoidable choice?

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Sustained low growth and low inflation – debt burdens never decline Debt erosion via ultra low interest rates But leads to new debt creation Debt write-off, default and restructuring

But has disruptive / depressive effect

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SLIDE 7

Institute for

New Economic Thinking

Two policy questions

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How to avoid getting into this mess How to get out

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SLIDE 8

Institute for

New Economic Thinking

Categories of credit creation and nominal demand

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Stimulates nominal demand Finance of investment Finance of consumption Finance of existing asset purchase

Stimulates nominal demand but required just to offset impact of inequality ?

  • No direct stimulus to nominal demand
  • Could just increase credit, money balances

and asset pricing

  • May stimulate demand via wealth effects

and Tobin’s Q effects

  • But not certainly proportional to credit

created

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SLIDE 9

Institute for

New Economic Thinking

Bank lending to real estate sector and prices Japan 1981 – 1999

8

  • 10%
  • 5%

0% 5% 10% 15% 20% 25% 30% 35% 40%

  • 30%
  • 20%
  • 10%

0% 10% 20% 30% 40% 50% 60%

Commercial Land Price in the Six Major Cities Bank Lending to the Real Estate Sector (R)

YoY%

Source: Japan Real Estate Institute; Bank of Japan; Profit Research Center Ltd; calculations by Prof. Richard Werner, Southampton University (see Princes of the Yen, Richard Werner, 2003)

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Institute for

New Economic Thinking

Credit creation for GDP transactions and nominal GDP: Japan, 1983 – 1999

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Source: Princes of the Yen, Richard Werner, 2003

  • 4
  • 2

2 4 6 8 10 12

  • 4
  • 2

2 4 6 8 10 12 83 85 87 89 91 93 95 97 99

YoY % Cr (L) Nominal GDP YoY %

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Explaining instability and secular stagnation |

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Quantity theory of disaggregated credit*

NOT But: So that: And:

∆M = ∆P. ∆Y

∆CR = ∆PR ∆CNR = ∆P. ∆Y ∆M = ∆CR + ∆CNR > ∆P. ∆Y

Velocity of circulation stable … where CR = credit to finance real estate purchase+ PR = price of real estate … CR = credit to finance GDP transactions P = prices of current goods and services Velocity of circulation falls

* See Richard Werner, New Paradigm in Macroeconomics + Or more generally to finance existing assets

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SLIDE 12

Institute for

New Economic Thinking

Monetary aggregates matter

But not because excessive Money is a forward indicator of inflation But because excessive Credit is a forward indicator of crisis, debt overhang, post crisis depression and deflation

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Institute for

New Economic Thinking

Two policy questions

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How to avoid getting into this mess How to get out

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SLIDE 14

Institute for

New Economic Thinking

Fe February 20th

th 2016

2016 13

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SLIDE 15

Institute for

New Economic Thinking

Nominal GDP growth and fiscal balance

2007 – 2016

7.2 6.5 3.5

US UK Eurozone

2.8 2.7 1.5

US UK Eurozone Source: IMF World Economic Database, April 2017; IMF Fiscal Monitor, 2017

Growth of nominal GDP % p.a. Average fiscal deficit as %

  • f GDP 2008-2016*

(*) General government Balance, Table 1, IMF Fiscal Monitor, April 2017

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Institute for

New Economic Thinking

Two essential sources of nominal demand growth

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Private credit and money creation

1

Sovereign fiat money creation – now or expected in the future

2

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Institute for

New Economic Thinking

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Dangerous Forbidden Free market ensures optimal result

  • Essential to deliver

some nominal demand growth

  • Can be contained by

rules So dangerous that banks should be abolished

Modern

  • rthodoxy

Chicago Plan Fiat money creation Private credit and money creation

  • States fail because of

short-term politics

  • Markets efficient and

rational

  • Bank credit markets

inherently inefficient and unstable

  • Political processes

can be rational

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