PDA

View Full Version : high debt to GDP ratio: inflationary or deflationary



friendly_jacek
12-11-09, 01:55 AM
According to Wikipedia, Zimbabwe has record high public debt to GDP ratio of 240% and Japan is second at 170%. Now this is just public debt, excluding private debt. The first country had multiyear hyperinflation, the second multiyear deflation.

USA will reach and likely exceed 100% public debt to GDP ratio sometime in 2010. While we generally expect the Zimbabwe scenario, why the Japan scenario is not a possibility?

Sorry if this was covered. I had a long hiatus from itulip.

ThePythonicCow
12-11-09, 04:48 AM
USA will reach and likely exceed 100% public debt to GDP ratio sometime in 2010. While we generally expect the Zimbabwe scenario, why the Japan scenario is not a possibility?

Sorry if this was covered. I had a long hiatus from itulip.
You're back just in time to read EJ's latest post "Asylum Markets", which covers this, and much else. See Asylum Markets of the post FIRE Economy Part I: Locked Up - Eric Janszen (http://www.itulip.com/forums/showthread.php?t=13395) and Asylum Markets of the post FIRE Economy Part II: The Next Recession - Eric Janszen (http://www.itulip.com/forums/showthread.php?t=13391). The U.S. depends on foreign creditors far more than Japan.

Kadriana
12-11-09, 09:58 AM
I wonder if you could see both. I don't know if you necessarily call it deflationary but I think if you start seeing a couple countries go bankrupt, you would have an initial flight to safety to the US dollar. I would think credit across the world might freeze up too trying to figure out who is going to go down next. Eventually, I think we'll see pretty decent inflation but I'm still not entirely convinced we're heading straight for that inflation.

Rajiv
12-11-09, 11:01 AM
According to Steve Keen (http://www.debtdeflation.com/blogs/2009/12/01/debtwatch-no-41-december-2009-4-years-of-calling-the-gfc/), Minsky on the other hand argued that


that a capitalist economy with sophisticated financial institutions could fall into a Depression as an excessive buildup of private debt occurred over a number of financially-driven business cycles.

Keen modelled and simulated Minsky's theories, and


generated outcomes like the one shown below: a series of booms and busts lead to debt levels ratcheting up over time, until at one point the debt-servicing costs overwhelmed the economy, leading to a Depression.


http://www.debtdeflation.com/blogs/wp-content/uploads/2009/12/KeenDebtwatchNo41December2009_files/image002.gif
Figure 1

When I began writing my Report, I started with the comment that “debt to GDP levels have been rising exponentially”. But since I was an Expert Witness in this case rather than the Barrister, I knew that I couldn’t rely on hyperbole–and if the trend of growth wasn’t exponential, then I couldn’t call it that. I expected that there would be a rising trend, but that it wouldn’t be quite exponential, so I would need to amend my initial statement.

I downloaded the data on Australian private debt and nominal GDP levels from the RBA Statistical Bulletin, plotted one against the other, and my jaw hit the floor: the trend was clearly exponential. The correlation coefficient of the data since mid 1964 with a simple exponential function was a staggering 0.9903. The only thing that stopped the correlation from being absolutely perfect were two super-bubbles (on top of the overall exponential trend) in 1972-76 and 1985-94.

http://www.debtdeflation.com/blogs/wp-content/uploads/2009/12/KeenDebtwatchNo41December2009_files/image004.gif
Figure 2

I expected that the situation in America would be as bad or worse, which was confirmed by a quick consultation of the Federal Reserve’s Flow of Funds data. Though not as obviously exponential as in Australia’s case, the correlation with simple compound growth was still 98.8%.

http://www.debtdeflation.com/blogs/wp-content/uploads/2009/12/KeenDebtwatchNo41December2009_files/image006.gif
Figure 3

So debt had been growing faster than GDP–4.2% per annum faster in Australia’s case for over 40 years, and 2.7% faster for longer in the USA’s. An unsustainable trend in debt had been going on for almost half a century.

Staring at those graphs (at roughly 3am in Perth, Western Australia), I realised that these debt bubbles had to burst (and probably very soon), that a global financial crisis would erupt when they did, that someone had to raise the alarm, and that given my knowledge, that someone was me. As soon as my Expert Witness Report was finished, I started making comments in the media about the likelihood of a recession.

Less than 2 years later, the Global Financial Crisis erupted, and economists who didn’t see it coming, and who for decades had argued that government spending could only cause inflation, suddenly called for–and got–the biggest government stimulus packages in world history to prevent an economic Armageddon.

To some degree, the government stimulus packages worked.

I am happy to admit that the scale of the government countermeasures surprised me. As Australia’s Prime Minister Kevin Rudd pointed out, the collective stimulus over the 3 years from September 2007 till September 2010 was expected to be equivalent to 18 percent of global GDP. That was huge–bigger in real terms than the US’s military expenditure during World War II.

That huge government stimulus has attenuated the severity of the crisis, and led to positive growth figures in many countries–most notably Australia, which recorded only one quarter of falling GDP versus a norm of 4 consecutive quarters for most of the OECD. But it still has not addressed the cause of the crisis–the excessive level of private debt, and the transition from a period of decades in which rising debt fuelled aggregate demand, to one in which the private sector’s attempts to reduce debt will subtract from aggregate demand.

For that reason, I do not share the belief that the GFC is behind us: while the level of private debt remains as gargantuan as it is today, the global economy remains financially fragile, and a return to “growth as usual” is highly unlikely, since that growth will no longer be propelled by rising levels of private debt.

friendly_jacek
12-11-09, 11:50 AM
You're back just in time to read EJ's latest post "Asylum Markets", which covers this, and much else. See Asylum Markets of the post FIRE Economy Part I: Locked Up - Eric Janszen (http://www.itulip.com/forums/showthread.php?t=13395) and Asylum Markets of the post FIRE Economy Part II: The Next Recession - Eric Janszen (http://www.itulip.com/forums/showthread.php?t=13391). The U.S. depends on foreign creditors far more than Japan.

Thanks for the links.
You can call me dense but I did not see answer to my question in the above posts.

You are probably correct about the Japan as the Japanese debt is mostly internal.

Nevertheless the question still stands why Japanese CB (ZIRP) and fiscal (deficit) liquidity bursts to neutralize debt deflation showed no inflation while the same policy in the USA is garanteed to be inflationary?

Seems like Marc Faber talks about hyperinflation (agrees with EJ on the inflation part, right?), but I'm still not sure why.

Is it because Japan's ZIRP produced inflation somewhere else via carry trade, ie NASDAQ bubble?

If so, how do we know if USA ZIRP will not produce a bubble in let's say emerging markets or energy?

friendly_jacek
12-11-09, 11:57 AM
According to Steve Keen (http://www.debtdeflation.com/blogs/2009/12/01/debtwatch-no-41-december-2009-4-years-of-calling-the-gfc/), Minsky on the other hand argued that



Keen modelled and simulated Minsky's theories, and

I happened to read the Keen's blog the other day, and his prediction (in 2005) about deflation was correct, but with poor timing of course.

Now, we have the debt bubble reignited by the government again. He is not sure how it will be resolved and proposes another deflation coming.

I tend to agree, but believe there will be some more inflation before deflation (like late 1970's) or 2004-2008.

I still don't know how it fits with Faber's hyperinflation theory based on high debt to GDP.

ThePythonicCow
12-11-09, 03:18 PM
Thanks for the links.
You can call me dense but I did not see answer to my question in the above posts.

You are probably correct about the Japan as the Japanese debt is mostly internal.

Nevertheless the question still stands why Japanese CB (ZIRP) and fiscal (deficit) liquidity bursts to neutralize debt deflation showed no inflation while the same policy in the USA is garanteed to be inflationary?

Seems like Marc Faber talks about hyperinflation (agrees with EJ on the inflation part, right?), but I'm still not sure why.

Is it because Japan's ZIRP produced inflation somewhere else via carry trade, ie NASDAQ bubble?

If so, how do we know if USA ZIRP will not produce a bubble in let's say emerging markets or energy?
I answered your earlier post too casually. I was doing but a simple "fuzzy" match on your word "Japan" with EJ''s post, while you had a coherent and detailed question. My bad.

I don't know the answer to your question.

c1ue
12-11-09, 04:18 PM
Nevertheless the question still stands why Japanese CB (ZIRP) and fiscal (deficit) liquidity bursts to neutralize debt deflation showed no inflation while the same policy in the USA is garanteed to be inflationary?

Short answer: Since Japan's debt is all internal, rising costs of imports due to falling yen are simply ignored since the currency account surplus is used to pay. The US on the other hand owes all its money abroad. While the US could unilaterally default on this external debt via devaluation and/or depreciation - in practice this is impossible as the US also needs ever increasing amount of new external debt in order to maintain its overconsumption.


Seems like Marc Faber talks about hyperinflation (agrees with EJ on the inflation part, right?), but I'm still not sure why.

Is it because Japan's ZIRP produced inflation somewhere else via carry trade, ie NASDAQ bubble?

The Japanese ZIRP did drive up inflation in other nations - principally those where carry-trade yen were invested into government bonds. NZ is one example.


If so, how do we know if USA ZIRP will not produce a bubble in let's say emerging markets or energy?<!-- / message -->

<!-- controls -->

The US ZIRP - or more correctly a dollar carry trade due to US ZIR - is likely to have some inflationary effect. However, this inflationary effect is so far more than compensated for by the fall in US demand.
As for bubbles - a new bubble is worthless if it isn't larger than the last bubble. What can possibly be larger than the residential and commercial real estate bubble? Arguably only a nationalization of all resources in the US would be large enough.

Nivelles
12-11-09, 09:35 PM
USA will reach and likely exceed 100% public debt to GDP ratio sometime in 2010. While we generally expect the Zimbabwe scenario, why the Japan scenario is not a possibility?

The Japan scenario is a possibility, and indeed it seems a certainty, as long as the U.S. is in bubble-decompression mode. That's what the Federal Reserve, and Treasury, are trying to do, pump the bubble. But the bubble isn't going to stay pumped, it'll keep wheezing and leaking, until all the surface tension is relieved. So to speak. As long as the bubble is decompressing: deflation.

Inflation will happen after the bubble is fully deflated, (and overshoots some,) and then rebounds. The rebound is the thing to watch out for. One possibility is that the U.S. will be permanently stuck with a lower standard of living, thus, insufficient rebound, but with all that liquidity in the system. Then we'd begin to transition from Japan-style to Zimbabwe-style home cookin'.

The U.S. real estate bubble isn't deflated yet. Residential and commercial are both still leaky.

Timing is everything.

My 2 cents, anyway.

friendly_jacek
12-13-09, 01:56 AM
Thank you all for responses. They seem to confirm what I suspect that the issue is more uncertain that some assume.

friendly_jacek
12-15-09, 04:55 PM
Update, I found a good writeup on Japan's problems:
http://seekingalpha.com/article/177471-will-japan-default

I still cannot get to grip with the fact that Japan is at a verge of collapse yet with a strong currency and low rates.

Will the same face USA in several years? Japan's problems started in 1990. USA started to crumble in 2000.