10 Comments
Nov 9, 2023Liked by Peter Farac

Fantastic post! Just the information I was waiting for. I have a suggestion for another post: exploring the different methods of government financing and how they affect GDP. Thanks!

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Nov 9, 2023Liked by Peter Farac

The private sector only owes interest to itself, so the mechanical effect of rising interest rates has a net zero effect. The contractionary effect comes from the unbalanced effect on consumption and investment from those that are paying interest; the effect on those parties is far greater than the effect on those receiving higher interest payments.

You mentioned that the person recieving interest has higher propensity to save, which I agree. But we know savings must either be consumed or invested, which then should boost GDP. Then why higher interest rates leads to a downturn?

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author

Saving can also mean debt repayment don't forget! This is what leads to a private sector surplus and the downward effect on GDP

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Nov 9, 2023Liked by Peter Farac

There maybe one minor error, as stated between the 2nd chart, titled "Federal Govt Interest Payments", that "When compared to history, the current quantum of interest payments HASN'T reached the peak as a percentage of GDP that occurred during the late 70s and early 80s."

From what I saw, the quantum of interest payments DID HAVE reached the peak as a % of GDP that occurred during the late 70s and early 80s(blue, lhs).

And pls forgive my striking in, I didn't find the "Federal Government Interest Payments" item on the website. Could you please kindly point it out for me? Thanks :)

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author

Thanks, that's fixed. I actually had it the right way around the first time and changed it!

Table 3.1 has that info

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Great article!

Can other countries do the same trick? EZ? UK?

I'm thinking about the UK problems with rising yield at the long end in Sep-Oct 2022 and subsequent Liz Truss resignation

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Hi, good day :)

You write: "Weighting the contribution to the total deficit from each sector and comparing to nominal GDP growth produces the chart below."

I am wondering how you are calculating these weights. Let's say the external balance is in surplus while private and public are in deficit, how do you calculate the weights then? Maybe I am missing something obvious.

Kind regards,

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Great article! It's always very insightful to read what you write. I have three questions.

1) Regarding the public spending and how it stimulates the economy. Is it worth accounting for interest payments to foreigners holding federal debt as this is money out of the country and doesn’t stimulate the economy in the same way?

2) I asked you a question on twitter a few days ago related to the construction of the bank-related private credit data series where you said it could be replicated mostly with loans and leases but you wouldn’t reveal the full construction of it. I respect that. I tried replicating the graph showing bank-related private credit as % of GDP by using loans&leases as a proxy for bank-related private credit but ended up with a slightly different chart. The overall level is a bit lower and the Covid increase in credit is not at the same level as the GFC level anymore. Just wanted to ask if this discrepancy might be related to the reclassification events you mentioned in the 2nd footnote?

3) What data do you use for the external sector balance?

Kind regards,

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author

Thanks!

1) In regards to foreign interest paid, if it stays in USD it has to be spent inside the USD economy at some point. The important factor is that the USD was created with debt in the first place

2) Yes you have to clean the data. I curated this over a number of years so I don't have the reclassification points on hand, but if I recall they were reported on the Fed website.

3) Just qtrly current account balance.

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