Geneva Report on the World Economy: “Deleveraging, What Deleveraging?”

This report (written Luigi Buttiglione, myself, Lucrezia Reichlin and Vincent Reinhart) will be available here from 9am this morning.  The VOX summary article is here.  FT report here.

Update: I will present the report in a Policy Institute seminar on Thursday 2nd October, 12-1, in IIIS seminar room at TCD.

15 replies on “Geneva Report on the World Economy: “Deleveraging, What Deleveraging?””

Well done, Philip. A very important contribution.
The marginal utility of each extra euro or dollar of debt may even be negative now and we do not have a growth driver to replace debt growth.

The Fed isn’t concerned about the price of all of these bonds either

“Monetary policy is too blunt a tool to tackle financial risks unless they become extreme, she said, because there would be a cost in terms of higher unemployment and below target inflation.“The potential cost, in terms of diminished macroeconomic performance, is likely to be too great to give financial stability risks a central role in monetary policy decisions, at least most of the time,” she said.”


Europe’s Austerity Disaster

29/09/2014 by Joseph Stiglitz

‘Austerity has failed. But its defenders are willing to claim victory on the basis of the weakest possible evidence: the economy is no longer collapsing, so austerity must be working! But if that is the benchmark, we could say that jumping off a cliff is the best way to get down from a mountain; after all, the descent has been stopped.

But every downturn comes to an end. Success should not be measured by the fact that recovery eventually occurs, but by how quickly it takes hold and how extensive the damage caused by the slump.

Viewed in these terms, austerity has been an utter and unmitigated disaster, which has become increasingly apparent as European Union economies once again face stagnation, if not a triple-dip recession, with unemployment persisting at record highs and per capita real (inflation-adjusted) GDP in many countries remaining below pre-recession levels.’

from the VOX piece:

‘… the ECB should catch up with the other major central banks in an aggressive policy of quantitative easing.

A forceful intervention with outright purchases of sovereign bonds – as well as private securities – is the correct tool for dealing with excessive downward pressure on inflation and fulfils the ECB mandate of price stability while helping the stabilization of the debt and easing credit conditions.

Further procrastination in implementing these by now urgent policy measures would risk, in the medium term, the resurgence of pressures on the sustainability of the Eurozone itself.’

Debt – the neu_WMD.

That said, if we picked up that 20 Billion from Geithner and a 20 Billion Citizenship Award from the ECB – Hibernia’s debt dyanmics might look ‘manageable’ ….

This paper was ‘interesting’. – referenced in the VOX link above.

Lo, S. and K. S. Rogoff (2014), “Secular Stagnation, Debt Overhang and Other Rationales for Sluggish Growth, Six Years On”, BIS 2014 Annual Conference.

The authors posited five possibilities for the less than ‘expected’ Rate-of-Growth: Secular Deficiency of Demand; Secular Stagnation due to Slowing Innovation; Demographics (aging); Policy Uncertainties – Political Infighting and Policy Errors!

Not once in the entire article did I see any reference, mention nor acknowledgement that ‘growth’ was actually an exponential rate function – which is kind of important. It means that ‘demand’ and ‘supply’ must also be exponential functions if the whole shebang is to keep moving forward. But in a physical system exponential rate functions will inevitably inflect over toward zero – and ‘growth’ will follow.

Now perhaps econometricians are fully aware of the exponential nature of the various rate functions, but assume its not significant, hence it is not incorporated into their models. I’ve no idea, but someone might like to enlighten me.

Now if the ‘new normal’ Rate-of-Growth is to be 1% (rather than 3%) then this will have quite interesting consequences: the economy will take 69 years to ‘double’ rather than the customary 23 years (two generations v less than one). That’s going to be one big, political headache.

Speaking of models, this one came to mind – bacterial cell growth. This can occur in either single or continuous batch mode. If the latter, there is a continuous pumped input of nutrients, with the simultaneously removal of waste materials and there is an ‘equilibrium level’ production of viable bacterial cells. System keeps going as long as the inputs and wastes are continuously added and removed (and you keep unwanted bugs out). But woe betide you if the pumps fail. The bacteria stop multiplying (no fresh nutrient) and any viable ones are promptly killed-off by increasing levels of toxic waste products. Bit like our economies?

Credit is the nutrient, debt the toxic waste (keeps growing). Better have someone fix those pumps pretty damn quick!

@ DOCM: Thanks for that. Did those imperial ancients know something about the maintenance of a orderly and vibrant society? Seems so. All our lot want to do is the financial equivalent of rape and pillage. A peaceful solitude?

Listening to the early RTE knews (sic) – Davey of someones are reporting on mortgage lending. Seems the rascals are at it again – never stopped by any account, lending multiples of salary; like x4 or even x5.

The correct multiples – if one is politically desirous of establishing and maintaining an orderly residential property market are: x 2 times the single salary, or x 2.5 the combined (if there are two earners). You have to think slow and hard about this one. Its not intuitively obvious: ts the 20:28:32 ratio Rule.

I would also mandate a 20% cash from savings deposit, plus documentary evidence of further cash deposits available to discharge all transaction costs.

As a matter of law all mortgage lending for one’s principle residence (your home) would be non-recourse. Lenders would also be prohibited by law from imposing any interest penalties or charges for late or non-payment of mortgage repayments. The nett results: –

1: The private residential property market would have low volatility – no or low susceptibility to asset price bubbles

2: Private residential property prices would be long-run affordable for folk on average wages

2: Probability of Negative Equity would be low

3: Probability of mortgage defaults ditto.

Chances of the above ‘rules’ being put into effect – ZERO! Outcome: more and continued personal misery in the private residential market (both purchase and rental).

As an aside. If a financial institution ‘fiats up’, using Fractional Reserve Lending or some such – can they then lay legal claim to ownership of that ex-niliho money? I’d like to see a Supreme Court ruling on that one. A related matter might be who is the legal owner of Legal Tender? And is a virtual, leveraged loan Legal Tender? Do we even have Legal Tender any more?

A brief-a-day, and all that! Thanks again.

p83 in the report “outright purchases of sovereign bonds ” easier said than done! … for the reasons that I have mentioned in the past in this blog. The report is excellent in many ways. But some of it could be more based in the real world.
I know there were some market practitioners at the conference. But I am not sure they had much input.
I am not a trader myself, but I can’t help thinking that some of the people who bandy about terms like QE would not benefit from a little internship at the coalface with the traders in front of me. Even some central bankers – who also may not have had much practical experience – can blithely talk about QE as if as easy as for the Fed or BoE. But the context in euros is very different, already in terms of market structure let alone the politics. This report – like many other contributions before it – obfuscate the policy options by not recognising the market reality. Already we will have a taste of that reality shortly when the ESCB comes in to attempt to buy ABS and cobo buying. That latter market – covered – is dying on its feet. Expressions like “throwing out the baby with the bathwater”, or “killing with kindness”, come to mind. And no market, … no economy! … think !

@ Ciaran O’Hagan

“And no market, … no economy! … think !”

Priapic markets get in the way of the real economy too, quand meme .
The financial sector is a long way from functional at this stage.

“According to William Lazonick, a scholar at the University of Massachusetts Lowell, seven of the top 10 largest share repurchasers spent more on buybacks and dividends than their entire net income between 2003 and 2012. In the case of Hewlett-Packard, which spent $73bn, it was almost double its profits. For ExxonMobil, which came top with $287bn in buybacks and dividends, it amounted to 83 per cent of net income. Others, such as Microsoft (125 per cent), Cisco (121 per cent) and Intel (109 per cent) were even more extravagant. In total, the top 449 companies in the S&P 500 spent $2.4tn – or more than half their profits – on buybacks in those years. They spent almost the same again in dividend payouts. Taken together, they came to 91 per cent of net income.
Can America’s boardrooms really have no better use for their cash? The answer is evidently no.”


“Credit is the nutrient, debt the toxic waste (keeps growing)”.

Credit is very like phosphates. Marginal utility reducing alarmingly. Big problem with the externalities. Not going to generate much in the way of extra growth in the future.

I’ll take issue with the Graph 3 b

showing GDP of the developed world versus various forecasts (f/c)

These are roughly 4.7% prior 2008, and the dashed latest has a mysterious offset of 10% and a growth rate of about 1%

Adding up PPPGDP of the developed countries according to the IMF definition (31 countries) I get growth rates of 5% in the years up to and including 2007,

and 4% in the future, a very reasonable value with 2% inflation and 2% growth rate

Furtheron the value for the year 2013 exceeds the 2006 value by 20%, not showing much of a problem

Disaster is nowhere to be seen in the IMF data. The Difference of growth rates just expresses the excess inflation of 3% during the pre 2007 years in the US

The IMF inflation forecast for Germany is 1.7%, well within the mandate of the ECB

Fig 4.13 one more digit on the lhs would be nice, and having the same % delat on both scales (a very petty technical remark)

Fig 4.15 shows

a) for the US a long term rise of above 1.8%, EMU 1.2%, the Delta is nearly completely explained by the different population growth rates of 0.77% US minus 0.22% EU = 0.55% (CIA world fact book)

b) both had a debt fuelled bubble, with Current account deficits in 2008
(Greece 15%, Ireland 6%, Portugal 13%, Spain 10% of GDP)
in the EMU so extreme, that the correctly weighted output gap (IMF data) was 3.2% in 2007!

c) the output gaps in France are exclusively the consequence of the lack of any structural reform (e.g. minimum wage 54% of GDP per capita, or around 65% of median wage vs Ireland 42%), in Italy very little, Spain with there special over construction problem.

Pension levels (net replacement rate) and contributions to them have to match. What has changed since the OECD 8111011e.pdf report?

The idea that a country can not flourish while paying down 2% debt per year is strange. German exports a 6% current account surplus.

I simply can not understand how anybody can hope that open violation of treaties (no bail out) and abusing the ECB for financial transfers would not do much more harm to confidence in the rule of law in Europe, create hatred and justified distrust

compared to the vaguely argued small benefits of it.

This has the potential to not only blow up the Euro, but the EU with it.

I think it helps to understand the situation,

Looking at the IMF “WEO Subject Code”

LE Employment
LP Population

and dividing both

Country 1994 2004 2014
France 0.393 0.409 0.404
Germany 0.439 0.430 0.506
Ireland 0.340 0.463 0.400
Italy 0.359 0.390 0.373
NL 0.438 0.482 0.494
Spain 0.318 0.419 0.361
Sweden 0.445 0.476 0.484
UK 0.441 0.476 0.471
US 0.467 0.475 0.458

while the presumable “geriatric” Germany was with Agenda 2010 extremely successful to mobilize the workforce, even beyond the “liberal” Ireland, NL, Sweden,UK,US

France (even with the 35 hour week), Spain, and Italy hover since dozens of years at low employment, caused by structural problems,

and NOT by any business cycle related aggregate demand (AD) problems.

All these countries must embark on structural changes and not add even more debt to the already high numbers.

Breaking treaties is not an option.


Everybody with a K-12 education should be capable to download these data from the IMF and do the simple calculations.

And I hope, that most readers here are on a little higher level than just a K-12.

Comments are closed.