debt traps, public and private - institute for new ... · debt traps, public and private adair...
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Debt Traps, Public and Private
Adair TurnerChairmanInstitute for New Economic Thinking
INET Plenary Conference Edinburgh 22nd October 2017
ineteconomics.org|facebook.com/ineteconomicsUSA300ParkAvenueSouth,5thFloor,NewYork,NY10010| UK22ParkStreet,LondonW1K2JB
InstituteforNewEconomicThinking
InstituteforNewEconomicThinking
Private domestic credit as a % of GDP: Advanced economies 1950 – 2011
1
Source:FinancialandSovereignDebtCrises:SomeLessonsLearnedandThoseForgotten,C.Reinhart&K.Rogoff,2013
InstituteforNewEconomicThinking
Textbook descriptions of banks and bank lending
2
Bankstakedepositsofmoneyfromsaversandlendittoborrowers
Bankslendmoneyto‘entrepreneurs/businesses’,thusallocatingfundsbetweenalternativeinvestmentprojects
InstituteforNewEconomicThinking
Share of real estate lending in total bank lending
Source:“TheGreatMortgaging”,OscarJordá,MoritzSchularick andAlanTaylor,2014)
3
10%
20%
30%
40%
50%
60%
Percen
tage
InstituteforNewEconomicThinking
Japanese government and corporate debt: 1990 – 2010
0
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
Banklendingtonon-financialcorporates GeneralGovernmentdebt
4
Source:BoJ FlowofFundsAccounts,IMFWEOdatabase(April2011),FSAcalculations
%GDP
InstituteforNewEconomicThinking
Debt overhang : the unavoidable choice?
5
Sustainedlowgrowthandlowinflation– debtburdensnever
decline
Debterosionviaultralow
interestrates
Butleadstonewdebtcreation
Debtwrite-off,defaultandrestructuring
Buthasdisruptive/depressiveeffect
InstituteforNewEconomicThinking
Categories of credit creation and nominal demand
7
StimulatesnominaldemandFinanceofinvestment
Financeofconsumption
Financeofexistingassetpurchase
Stimulatesnominaldemand butrequiredjusttooffsetimpactofinequality?
• Nodirectstimulustonominaldemand• Couldjustincreasecredit,moneybalancesandassetpricing
• MaystimulatedemandviawealtheffectsandTobin’sQeffects
• Butnotcertainlyproportionaltocreditcreated
InstituteforNewEconomicThinking
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:JapanRealEstateInstitute;BankofJapan;ProfitResearchCenterLtd;calculationsbyProf. RichardWerner,SouthamptonUniversity(seePrincesoftheYen,RichardWerner,2003)
InstituteforNewEconomicThinking
Credit creation for GDP transactions and nominal GDP: Japan, 1983 – 1999
9
Source:PrincesoftheYen,RichardWerner,2003
-4
-2
0
2
4
6
8
10
12
-4
-2
0
2
4
6
8
10
12
83 85 87 89 91 93 95 97 99
YoY %
Cr(L)
NominalGDP
YoY %
Explaininginstabilityandsecularstagnation| 10
Quantity theory of disaggregated credit*
NOT
But:
Sothat:
And:
∆M=∆P.∆Y
∆CR =∆PR
∆CNR =∆P.∆Y
∆M=∆CR+∆CNR> ∆P.∆Y
Velocityofcirculationstable
…where CR =credittofinancerealestatepurchase+
PR =priceofrealestate
…CR =credittofinanceGDPtransactions
P=pricesofcurrentgoodsandservices
Velocityofcirculationfalls
*SeeRichardWerner,NewParadigminMacroeconomics
+Ormoregenerallytofinanceexistingassets
InstituteforNewEconomicThinking
Monetary aggregates matter
Butnot becauseexcessiveMoneyisaforwardindicatorofinflation
But becauseexcessiveCreditisaforwardindicatorofcrisis,debtoverhang,postcrisisdepressionanddeflation
11
InstituteforNewEconomicThinking
Nominal GDP growth and fiscal balance2007 – 2016
7.2
6.5
3.5
US
UK
Eurozone
2.8
2.7
1.5
US
UK
Eurozone
Source:IMFWorldEconomicDatabase,April2017;IMFFiscalMonitor,2017
GrowthofnominalGDP%p.a.
Averagefiscaldeficitas%ofGDP2008-2016*
(*)GeneralgovernmentBalance,Table1,IMFFiscalMonitor,April2017
14
InstituteforNewEconomicThinking
Two essential sources of nominal demand growth
15
Privatecreditandmoneycreation1
Sovereignfiatmoneycreation– noworexpectedinthefuture
2
InstituteforNewEconomicThinking 16
Dangerous
Forbidden
Freemarketensuresoptimal
result
•Essentialtodeliversomenominaldemandgrowth
•Canbecontainedbyrules
Sodangerousthatbanksshouldbe
abolished
Modernorthodoxy
ChicagoPlan
Fiatmoneycreation
Privatecreditandmoneycreation
•Statesfailbecauseofshort-termpolitics
•Marketsefficientandrational
•Bankcreditmarketsinherentlyinefficientandunstable
•Politicalprocessescanberational