Stagnation Adair Turner Senior Fellow Institute for New Economic - - PowerPoint PPT Presentation

Debt Overhang and Secular Stagnation

Adair Turner

Senior Fellow Institute for New Economic Thinking

Cass Business School London, 25th March 2015

www.ineteconomics.org 300 Park Avenue South, New York, NY 10010 | 22 Park Street, London W1K 2JB

IMF Medium term growth projections

1 2 4 6 Advanced Economies Emerging Market & developing countries World Fall 2011 Spring 2012 Fall 2012 Spring 2013 Fall 2013 Spring 2014 Source: IMF World Economic Outlook, October 2014

US Payroll employment monthly increases

December 20112 – December 2014

2 50 100 150 200 250 300 350 400

2012-01 2012-02 2012-03 2012-04 2012-05 2012-06 2012-07 2012-08 2012-09 2012-10 2012-11 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

Source: US Bureau of Labor Statistics

%

Nominal yield on 10-year Government Bonds

3 0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5

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

USA UK Germany Japan

% monthly Source: Federal Reserve Bank of St. Louis and IMF data

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

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

Advanced economies 1950 – 2011

Share of real estate lending in total bank lending

6 Source: The Great Mortgaging, Professor Alan Taylor, University of California, Davis

Ratio of real estate lending to total lending

0.1 0.2 0.3 0.4 0.5 0.6 0.7

1880 1890 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010

10% 20% 30% 40% 50% 60% 70%

Credit and asset price cycles: upswing

7

Expectation of future asset price increases Increased credit extended

Low credit losses: high bank profits

• Confidence reinforced
• Increased capital base

Increased asset prices Increased lender supply of credit Favourable assessments of credit risk Increased borrower demand for credit

Credit extension and house prices

House prices 2000 – 2007 Household debt as a % of GDP 2000 – 2007

Source: BEA; ONS; ECB

20 40 60 80 100 120 Q1 2000 Q1 2001 Q1 2002 Q1 2003 Q1 2004 Q1 2005 Q1 2006 Q1 2007 % GDP US UK Spain Ireland 50 100 150 200 250 Q1 2000 Q1 2001 Q1 2002 Q1 2003 Q1 2004 Q1 2005 Q1 2006 Q1 2007 Index: 2000 = 100 Spain US UK Ireland

Source: Ministry of Housing (Spain), S&P (US), DCLG

8

Credit and asset price cycles: downswing

9

Expectation of future asset price falls Less credit extended

High credit losses: low bank profits

• Confidence dented
• Reduced capital base

Falling asset prices Restricted lender supply of credit Cautious assessments of credit risk Reduced borrower demand for credit

Sectoral financial surpluses/deficits as % of GDP: Japan 1990 – 2012

10 Source: IMF, Bank of Japan Flow of Funds Accounts

• 15
• 10
• 5

5 10 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 PNFCs Government

%

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

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

% GDP

Shifting leverage: Private and public debt-to-GDP

12

12

50 65 80 95 110

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Household Non-financial Corp Public

% GDP

Source: Geneva Report No 16 Deleveraging, What Deleveraging? ICMB / CEPR September 2014

Developed economies – Debt to GDP

13

Global debt excluding financials

Source: Geneva Report No 16 Deleveraging, What Deleveraging? ICMB / CEPR September 2014

100 120 140 160 180 200 220 240 260 280 01 02 03 04 05 06 07 08 09 10 11 12 13

Developed Markets Emerging Markets World % of GDP

14

Emerging markets: total debt as % of GDP

(excluding financial sector debt)

15 60 80 100 120 140 160 180 200 220 240 1 2 3 4 5 6 7 8 9 10 11 12 13 Series1 Series2 Series3 Series4 Series5 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

China China Turkey Brazil India Emerging Markets

Source: Deleveraging, What deleveraging, The Geneva Report, 2014

China: debt as % of GDP

16

42 55 20 38 72 125 24 65 2007 2014 Q2

Financial institutions Non-Financial corporations Households Government

Source: McKinsey Global Institute

Total debt ($tr) 7.4 28.2 158 282

China’s debt exposure to property

17 Source: McKinsey Global Institute

$ trillion

Household Real estate Real estate related Government Total exposure to property As % of total non- financial debt 8 10-15 10-15 10 40-45

1.8 2.5-3 2-2.5 2.2 8.5-9.5

Shifting leverage: Germany credit-driven growth

18 Source: Deleveraging, What deleveraging, The Geneva Report, 2014 100 120 140 160 180 200 220 240 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Spain China Germany

General Government primary deficit

19 Euroz

• ne

Japa n UK US

7.2 6 7.8 1.6

Japan Eurozone

Source: International Monetary Fund Fiscal Monitor, October 2014

% of GDP, average 2008- 2013

• 6
• 5
• 4
• 3
• 2
• 1

1 2 3 4 2008 2009 2010 2011 2012 2013

Net Exports as % of GDP

UK USA Japan Eurozone

70 80 90 100 110 120 130 2008 2009 2010 2011 2012 2013 2014

Nominal GDP, 2008=100

UK USA Japan Eurozone

Sources: (IMF WEO, WB WDI) 70 80 90 100 110 120 130 2008 2009 2010 2011 2012 2013

UK USA Japan Eurozone

Domestic Demand (GDP - Net Exports) 2008=100

20

Nominal demand growth 2008 – 2014

21

Raising actual and potential growth must remain a priority. In advanced economies, this will require continued support from monetary policy

The extended period of monetary accommodation and the accompanying search for yields are leading to credit mispricing and asset price pressures, and increasing the chance that financial stability risks could derail the recovery. IMF Global Financial Stability Review October 2014

IMF World Economic Outlook October 2014

Shifting leverage: back to private again

22

UK Public net debt as % of GDP: 2009 - 2019

40 45 50 55 60 65 70 75 80 85 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

UK Household gross debt as % of income: 2009 - 2020

% Percent 140 145 150 155 160 165 170 175 180 185 2009Q1 2010Q1 2011Q1 2012Q1 2013Q1 2014Q1 2015Q1 2016Q1 2017Q1 2018Q1 2019Q1 2020Q1 Source: Office of Budget Responsibility, Economic and Fiscal Outlook, December 2014

Exchange rate depreciation

23 70 75 80 85 90 95 100 105 January 2013 April June October January 2014 April June October January 2105 March

Euro Yen Yen and Euro versus US$

Source: IMF data and statistics

Debt and demand in the debt overhang trap

24

Domestic impact of ultra loose monetary policy more private debt

Debt does not go away: it simply shifts

Currency devaluations do not stimulate global demand: they shift demand

Demand can only be stimulated (rather than shifted) by:

From one country to another Fiscal deficits more public debt From private to public, and then back From one country to another

Global debt excluding financials

Source: Geneva Report No 16 Deleveraging, What Deleveraging? ICMB / CEPR September 2014

100 120 140 160 180 200 220 240 260 280 01 02 03 04 05 06 07 08 09 10 11 12 13

Developed Markets Emerging Markets World % of GDP

25

26

Public debt to GDP: US and UK

Source: DMO, ONS

National debt as % of GDP 50 100 150 200 250 300 1930 1935 1940 1945 1950 1955 1960 1965 1970 1975 1980 % GDP

Ensuring long-term Japan debt sustainability: IMF scenarios

27

Required cyclical changes in adjusted primary balance % of GDP

2010 2014 2020

Continuous surplus thereafter to reach

• 80% net debt
• 200% gross debt

by 2030

October 2014 Fiscal Monitor

• 6.5

+ 6.4

• 6.0

+ 5.6 November 2010 Fiscal Monitor

7% 5% 4%

Greece Ireland, Italy & Portugal Spain

28

Eurozone debt brake implications

Source: Barry Eichengreen: The Bond Markets’ Dance, FT.com, 17 November 2014

Requirement: reduce debt to GDP each year by 1/20th of the excess over 60% of GDP Requires primary budget surpluses for 10+ years of:

Debt overhang: the unavoidable choice

29

Debt

Debt write-off, default, restructuring Debt erosion via inflation, monetisation Sustained slow growth and low deflation Stimulating yet more credit

Debt overhang and deleveraging Long-term secular trends

30

Real yields to maturity on UK indexed linked gilts

Source: Bank of England Statistics, Zero coupon real yields

31 Percent

• 1

1 2 3 4 5 1985 1986 1987 1988 1989 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 20-year yield 10-year yield

Why did real rates fall so much even before the crisis?

32

Reduced investment needs?

• In plant and machinery?

Ex-ante savings Ex-ante investment

Global imbalances? Inequality? Demographic effects?

• In advanced economy

property and infrastructure?

Global savings rates: 1990 – 2014

33 15 20 25 30 35 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 World Advanced economies Emerging economies Source: International Monetary Fund, World Economic Outlook Database, October 2014 % GDP

Average income increases US (1980=100)

50 100 150 200 250 300 350 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

bottom 20% top 5% top 1%

S Source: US Census Bureau; World Top Incomes Database

34

Why did real rates fall so much even before the crisis?

35

Reduced investment needs?

• In plant and machinery?

Ex-ante savings Ex-ante investment

Global imbalances? Inequality? Demographic effects?

• In advanced economy

property and infrastructure?

Advanced economy investment as % of GDP

36

15 20 25 1990 1992 1994 1996 1998 2000 2001 2004 2006 2008 2010 2012 2014

% of GDP

Source: International Monetary Fund, World Economic Outlook Database

Wealth and employment in ICT businesses

Market Value ($bn) Employees (000s) 330 ͠ 99,000 404 ͠ 50,000 170 ͠ 6,000 1* ͠ 12 19* 55

37

We have over 1 million users per engineer and this number has been steadily increasing

* Paid by Facebook

With only 32 engineers, one WhatsApp developer supports 14 million active users

Output per capita and real wages in 19th century Britain

1800 - 1830 1830 - 1860 1860 - 1900 Source: Engel’s Pause: Technical Change, Capital accumulation and Inequality in the British Industrial Revolution, R. C. Allen (2009)

% Per annual change

0.6 0.0 1.1 1.6 1.0 0.8

38

Probability that computerisation will lead to job losses 2010 – 2030

OCCUPATION PROBABILITY

(1=certain)

Recreational Therapists 0.003 Personal Trainers 0.007 Firefighters 0.17 Economists 0.43 Machinists 0.65 Retail salesperson 0.92 Accountants & auditors 0.94 Telemarketers 0.99

Source: The Future of Employment: How Susceptible are Jobs to Computerisation? C. Frey and M. Osborne (2013)

39

US Jobs growth forecast, 2012 – 2022

40 20 65 21 21 18 24 32 30 22 30 19 90 1 2 3 4 5 6 7 8 9 1 1 9 2 6

Median annual wage ($000s)

Occupational categories by speed

• f job growth

Forecast job growth (000s)

1 Personal care aides

580

2 Registered nurses

527

3 Retail sales persons

435

4 Home health aides

424

5 Food preparation and serving aides

422

6 Nursing aides

312

7 Secretaries and administrative assistants

308

8 Customer services reps

299

9 Janitors and cleaners

280

10 Construction labourers

260

19 Maids and house keeping cleaners

183

26 Software developers, applications

140

Source: Bureau of Labor Statistics, www.bls.gov

All sector average: 35

Growth in average wages and labour productivity

41 Real wage index Labour productivity index 100 103 106 109 112 115 118 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Developed economies, 1999 – 2013

Source: Global Wage Report 2014/15, International Labour Organisation

Labour income share in developed G20

42 Germany France Italy UK USA Japan Canada Australia

52 56 60 64 68

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Adjusted labour income share (%) Source: Global Wage Report 2014/15, International Labour Organisation

Labour income share in China

43

42 44 46 48 50 52 54 56

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Unadjusted labour income share (%)

Source: Global Wage Report 2014/15, International Labour Organisation

US population growth and job creation

44

2000 2005 2010 2015 2020 Population aged 20-69

(Millions)

178 189 200 209 214 Total in employment

(Millions)

137 142 139 148 Employment rate 77.8% 75.1% 69.5% 70.8% ͠

Source: UN Population Database (www.un.org); Bureau of Labor Statistics )(www.bls.org)

Why did real rates fall so much even before the crisis?

45

Reduced investment needs?

• In plant and machinery?

Ex-ante savings Ex-ante investment

Global imbalances? Inequality? Demographic effects?

• In advanced economy

property and infrastructure?

Capital in France 1700 – 2010

46

0% 100% 200% 300% 400% 500% 600% 700% 800% 1700 1750 1780 1810 1850 1880 1910 1920 1950 1970 1990 2000 2010 % national income Net foreign assets Other domestic capital Housing Agricultural land

Source: Capital in the Twenty First Century, T. Piketty (2013)

Deficient demand: secular and cyclical drivers

47

The high-tech/ high- touch economy

• ICT, automation,

robots and apps

• Network externalities,

brands and design

• Wealth creation

without investment

• Rising importance of

irreproducible land

• Increasing inequality

Secular demand deficiency?

• Ex-ante S ˃ ex-ante I
• Deficient demand

unless credit fuelled consumption

• Low equilibrium real

interest rates

• Rising leverage –

primarily against real estate/land Crisis and debt

• verhang
• Excess leverage

produces crisis

• Debt overhang,

deleveraging, and chronic under- demand

• Equilibrium real

interest rates still further reduced

What will happen

48

No crisis, but big slowdown The helicopter money end game: no big deal? Playing with social and political fire OK but unbalanced growth Robust but not as good as hoped