Kenneth Rogoff contends that serious economic problems result when debt to GDP ratio exceeds 90 percent. Of course, there is no magic line which says 89 percent is safe. A lot may depend on public perception about macro economic conditions. Japan, whose debt to GDP ratio is almost 200 percent still has interest rates hovering near absolute kelvin. Perhaps we need economists to explain this contradiction using a different framework.
My guess says that this can be explained by the ability of Japan to issue own currency which is not equivalent to the US dollar but is also one of the reserve currencies of the world. (India also issues its own currency but the status of rupee is different from yen. So the same is not applicable to us). Also add in the factors of deleveraging of consumers, the faith of nations in the virtues of keeping local currency cheap, a ray of light can emerge from this apparent theoretical darkness. God help USA if it expects to export its way out of its savings deficit. I believe, global economy is suffering from excess capacities on one side and lack of purchasing power of consumers on the other side. (Again, the caveat is that this logic will not work for consumers of trade surplus nations who lack purchasing power due to either barriers against consumption or an artificially depressed currency which deprives consumers of their purchasing power. In the case of china, absence of social security net in terms of education, health and retirement may drive consumers to depress consumption and elevate savings). Economic health can be restored globally only when destruction of excess capacity takes place (which has to take place at some point in time as the demand gap is unlikely to be filled anytime soon). Indirectly, this will imply destruction of capital. The logic is simple. Those who have capital do not have returns (absence of avenues for investment) and those who need capital are over leveraged. Sanity will return only when deleveraging takes place. The process will involve switching from consumption to savings by leveraged consumers who will try to pay down their debt. That will imply a prolonged contraction of demand. Contraction of demand will involve losses for producers. That will entail job losses which will further compress demand. The cycle will continue till the excess capacity and excess debt (over and above the servicing ability of debtors) disappear. Both these trends portend that global economy will enter a contractionary phase in which we can expect countries to put up tariff and non tariff barriers to protect domestic industries, look for administrative actions that curtail domestic job losses (connect with outsourcing) and go for competitive devaluation. The trade wars, the currency wars and the job wars are about to begin. I intend buying a ticket to watch the happenings and look for safety to insulate myself from the coming storm. Will I be able to do that?
My guess says that this can be explained by the ability of Japan to issue own currency which is not equivalent to the US dollar but is also one of the reserve currencies of the world. (India also issues its own currency but the status of rupee is different from yen. So the same is not applicable to us). Also add in the factors of deleveraging of consumers, the faith of nations in the virtues of keeping local currency cheap, a ray of light can emerge from this apparent theoretical darkness. God help USA if it expects to export its way out of its savings deficit. I believe, global economy is suffering from excess capacities on one side and lack of purchasing power of consumers on the other side. (Again, the caveat is that this logic will not work for consumers of trade surplus nations who lack purchasing power due to either barriers against consumption or an artificially depressed currency which deprives consumers of their purchasing power. In the case of china, absence of social security net in terms of education, health and retirement may drive consumers to depress consumption and elevate savings). Economic health can be restored globally only when destruction of excess capacity takes place (which has to take place at some point in time as the demand gap is unlikely to be filled anytime soon). Indirectly, this will imply destruction of capital. The logic is simple. Those who have capital do not have returns (absence of avenues for investment) and those who need capital are over leveraged. Sanity will return only when deleveraging takes place. The process will involve switching from consumption to savings by leveraged consumers who will try to pay down their debt. That will imply a prolonged contraction of demand. Contraction of demand will involve losses for producers. That will entail job losses which will further compress demand. The cycle will continue till the excess capacity and excess debt (over and above the servicing ability of debtors) disappear. Both these trends portend that global economy will enter a contractionary phase in which we can expect countries to put up tariff and non tariff barriers to protect domestic industries, look for administrative actions that curtail domestic job losses (connect with outsourcing) and go for competitive devaluation. The trade wars, the currency wars and the job wars are about to begin. I intend buying a ticket to watch the happenings and look for safety to insulate myself from the coming storm. Will I be able to do that?
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