Stabilization Policies - Drowning in Debt? Sandro Scocco Chairman of Global Utmaning’s Economic Council
Dec 08, 2014
Stabilization Policies - Drowning in Debt?
Sandro ScoccoChairman of Global Utmaning’s
Economic Council
High Unemployment:
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 20100
5
10
15
20
25
30
GermanyGreeceIrelandItalyPortugalSpainUnited KingdomUnited States
Great need for further countercyclical policies!
Relatively strong rebound due to early focus on countercyclical policies
Source: Barry Eichengreen Kevin H. O’Rourke 8 March 2010 www.voxeu.org
Global industrial production Global stock market development
Countercyclical policies are expensive…Source: OECD Economic Outlook
-100
-50
0
50
100
150
200 Statsskuld som andel av BNP 1997 Statsskuld som andel av BNP 2007Statsskuld som andel av BNP Skillnad
-100
-50
0
50
100
150
200
250 Statsskuld som andel av BNP 2007 Statsskuld som andel av BNP 2011Statsskuld som andel av BNP Skillnad
… and the traditionally weakest are in crisis (PIIGS)10 year bond rates
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
-20
-15
-10
-5
0
5
10
GermanyGreeceIrelandItalyPortugalSpain
The Real Villain: European saving imbalances as a result of interest rate convergence
in the EMU
… and China joining the WTO in 2001Global Saving imbalances USD (IMF)
199019911992199319941995199619971998199920002001200220032004200520062007200820092010
-1000
-800
-600
-400
-200
0
200
400
600
China, People's Republic ofUnited StatesEuro area
Public debt in the G20 at a historical high
1880 1886 1892 1898 1904 1910 1916 1922 1928 1934 1940 1946 1952 1958 1964 1970 1976 1982 1988 1994 2000 20060
20
40
60
80
100
120
140
160
WW1
WW2
Who will pay the public debt?
“In addition to providential rapid growth, there are three, and only three, ways of bringing down public debts.
• The first one is to run primary surpluses for a sufficiently long time. • The second one is to default on all or part of the debt.• The last one is to let inflation reduce the real debt value, assuming that the debt is not indexed and of sufficiently long maturity.
In the end, the question is who will pay: taxpayers in the first case, creditors in the second case, citizens who are not well protected against inflation in the third case.”
Public Debts: Nuts, Bolts and Worries 2011Barry Eichengreen, Robert Feldman, Jeffrey Liebman, Jürgen von Hagen and Charles Wyplosz
Households
High household indebtedness starts to fall…
…and housing prices follow
Can housholds and the public sector deleverage simultaneously without hurting growth?
• No, not ceteris paribus – obvious risk of vicious circles. Austerity programmes increase households’ wish to deleverage
• Yes, if income redistribution policies target propensity to consume. Increased demand without increased public or private indebtedness
30 years of targeting propensity to save/investTop one per cent’s share of total income
The two stories of the US post-war era
Financial bail-outs reversed wealth tax
“… a €200 billion subsidy to sovereign creditors is a gigantic wealth transfer from the taxpayer to essentially the richest 5% of the world. In the US, the 5% richest households control roughly 70% of all financial wealth, and this percentage is not much different in the rest of the world. Ultimate … we should characterise the bailout subsidy as an "impôt pour la fortune" (“a tax for wealth”) – a wealth tax supporting the rich.”
Harald HauProfessor of Economics and Finance, University of Geneva
"The Chinese use two brush strokes to write the word 'crisis'. One brush stroke stands for danger; the other for opportunity. In a crisis, be aware of the danger-but recognize the opportunity."
John F. Kennedy