Hey Peter, coming from another article of yours. Have two questions that might be easier than what I'm making them out to be but want to hear your thoughts:
1) Why is growth so dependent on increasing leverage (both public and private)? Is it because productivity gains have slowed?
2) If both the private and public sector decide to save/borrow (assuming govts don't want to smooth out the cycle), is that inevitably countered by a current account deficit/surplus?
1) The natural components of real GDP growth have slowed (labour force growth and total factor productivity growth) yet the debt load needs nominal GDP growth to continue like it has (nom GDP growth "pays" for the debt). The way to temporarily bridge the gap is by further increasing debt.
2) It's not inevitable. If both govt and private decided to "save" then the usual case would be that imports fall and the trade balance improves and the "savings" end up being invested offshore. This means that exports become a bigger part of the economy which is usually how recessionary economies recover. There may not always be someone to sell to however.
Sorry for seeing this so late! M Pettis is the best out there...I can't say that I add much to his amazing work but a collaboration would be incredible. Thankyou for the compliment!
Hi, great article as always! Very much appreciate your writings. Can I ask you why you multiply the 'All debt to GDP' graph with 40,000 and not just 4,000?
Thank you very much! I have another question if you don't mind. Why is it that you say Spain needs a currency devaluation? "Private sector debt is now below the early 2000s as a percentage of GDP and shows little sign of stopping its de-leveraging momentum, making Spain look like a country desperate for a currency devaluation." Could you elaborate on this please, I didn't understand it. Kind regards,
Continued deleveraging implies that production keeps on shrinking in a relative sense...normally in this situation a free-floating currency would nomrally devalue to try to source demand externally.
Spain is already running a current account surplus so that may not even be able to help...
You know it's a great piece when an economics subject concludes on people's behavioural patterns. You and Michael Pettis are my best follows on twitter, thanks so much.
All you need to know to understand that we are inexorably headed to towards either a inflationary default or a hard default is that the idea that the size and expense of government should be reduced is completely unfathomable to anyone at the federal level except to a few fringe types like Rand Paul.
The idea that maybe the federal reserve doesn't need 20,000 employees, or that there is a huge amount of waste and bloat in the military such that the budget could be reduced massively without a decrease in combat capability, or that it doesn't make sense that the capital police has 2,000 officers to protect the capital and ~550 members of congress, is simply not even thought of.
Because government spending in a fiat regime is entirely divorced from anything of value or any sense of fiscal responsibility, they will simply keep spending and borrowing and increasing the burden until something breaks.
It all comes from the desire to continue a certain way of life past the point where it can be afforded...this is tough for anyone to accept when an easy tool (raising debt) is so easily accessible.
I’m not sure that’s the case. It may come partly from a desire to hit a gdp growth target that doesn’t match with economic reality. It may come from an investment portfolio that doesn’t match with economic reality. It may simply be a product of uncertainty about exactly what is economic reality. Most likely there is an unknowable change in economic reality underway.
Man this is amazing. Who are you? Have you written a book?
This is a book coming together!
When can I expect it. I would love to buy it as soon as it is out.
Hey Peter, coming from another article of yours. Have two questions that might be easier than what I'm making them out to be but want to hear your thoughts:
1) Why is growth so dependent on increasing leverage (both public and private)? Is it because productivity gains have slowed?
2) If both the private and public sector decide to save/borrow (assuming govts don't want to smooth out the cycle), is that inevitably countered by a current account deficit/surplus?
Sorry for the late reply!
1) The natural components of real GDP growth have slowed (labour force growth and total factor productivity growth) yet the debt load needs nominal GDP growth to continue like it has (nom GDP growth "pays" for the debt). The way to temporarily bridge the gap is by further increasing debt.
2) It's not inevitable. If both govt and private decided to "save" then the usual case would be that imports fall and the trade balance improves and the "savings" end up being invested offshore. This means that exports become a bigger part of the economy which is usually how recessionary economies recover. There may not always be someone to sell to however.
This post talks more about this
https://www.macroisdead.com/p/cross-border-capital-flows-have-shaped
That makes sense, thank you Peter!
This is the best write up of sectoral analysis that I have ever seen. VERY educational for me.
Do you plan on doing a similar write up of China? I’d like to see a collaboration with Michael Pettis.
Make sure you read his book "the volatility machine". Everything you need to understand about the intersection between economics and markets.
Sorry for seeing this so late! M Pettis is the best out there...I can't say that I add much to his amazing work but a collaboration would be incredible. Thankyou for the compliment!
Hi, great article as always! Very much appreciate your writings. Can I ask you why you multiply the 'All debt to GDP' graph with 40,000 and not just 4,000?
Tahnkyou! Different units for the numerator and denominator...
Thank you very much! I have another question if you don't mind. Why is it that you say Spain needs a currency devaluation? "Private sector debt is now below the early 2000s as a percentage of GDP and shows little sign of stopping its de-leveraging momentum, making Spain look like a country desperate for a currency devaluation." Could you elaborate on this please, I didn't understand it. Kind regards,
Continued deleveraging implies that production keeps on shrinking in a relative sense...normally in this situation a free-floating currency would nomrally devalue to try to source demand externally.
Spain is already running a current account surplus so that may not even be able to help...
Thank you again, I appreciate you taking the time to answer the comments. Have a nice day :)
You know it's a great piece when an economics subject concludes on people's behavioural patterns. You and Michael Pettis are my best follows on twitter, thanks so much.
All you need to know to understand that we are inexorably headed to towards either a inflationary default or a hard default is that the idea that the size and expense of government should be reduced is completely unfathomable to anyone at the federal level except to a few fringe types like Rand Paul.
The idea that maybe the federal reserve doesn't need 20,000 employees, or that there is a huge amount of waste and bloat in the military such that the budget could be reduced massively without a decrease in combat capability, or that it doesn't make sense that the capital police has 2,000 officers to protect the capital and ~550 members of congress, is simply not even thought of.
Because government spending in a fiat regime is entirely divorced from anything of value or any sense of fiscal responsibility, they will simply keep spending and borrowing and increasing the burden until something breaks.
It all comes from the desire to continue a certain way of life past the point where it can be afforded...this is tough for anyone to accept when an easy tool (raising debt) is so easily accessible.
I’m not sure that’s the case. It may come partly from a desire to hit a gdp growth target that doesn’t match with economic reality. It may come from an investment portfolio that doesn’t match with economic reality. It may simply be a product of uncertainty about exactly what is economic reality. Most likely there is an unknowable change in economic reality underway.