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2018-10-12Macro `n Cheese

Not Everything is Black & (William) White

After reading a rather ominous column by the economist William White, and hearing that Paul Romer was awarded the Nobel Prize in Economics, our very own market pundit, Roger Josefsson, was inspired to build a few charts and write a few comments. It wouldn’t be Roger if there weren’t clouds on the horizon, but timing is – as Roger puts it – everything…

At the time of writing, William Nordhaus and Paul Romer have just been awarded the 2018 “Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel 2018”, and I think we can all agree that it was particularly good to check that box on Romer who has been on top of most economists’ short list for receiving the Nobel Prize for, well, ever (yes, Nordhaus has been up there too). What got me started writing, though, was a column, “Bad Financial Moon Rising” (what is up with us economists funny headers on our articles? ;) ) that William (Bill) White has written for Project Syndicate. I have always been a fan of Bill’s analysis and it actually fits in quite nicely with some of Romer’s more recent hang-ups.

You know the debt crisis[1]? – You might think or at least hope that the situation has improved. It has not. It’s worse now than ever before.


Well, almost every financial crisis involving private debts have been followed by rising public debt so isn’t this just a function of government debt rising as the private sector deleveraged post-GFC?


- Well, for advanced economies this might be a correct interpretation. Note, however, in the advanced economies’ non-financial corporate sector debt-to-GDP levels are currently at or above where they were when the great recession struck so to the extent there has been any private sector deleveraging it is not in the corporate sector. The one thing that stands out, nonetheless, is the unrivalled rise in emerging economies’ corporate indebtedness. For China, the lion’s share of the EME aggregate, it is even necessary to change scale to be able to illustrate developments in a transparent manner. Fact is, that excluding China, global private sector debt to GDP has been quite stable since the financial crisis (EME and NFC data is also enclosed in the below file, but with shorter history)


Now, turning more specifically to the household sector, our view of traditional post-financial crisis behavior in advanced economies, where households have deleveraged is only reinforced. After the crisis EME households have more or less doubled their debt-to-income again driven, primarily, by developments in China.



A word of caution though. While government debts and household debts are often backed by the same type of assets (e.g. infrastructure and houses), corporate sectors differ dramatically from one country to the other. In my home country Sweden, for example, the corporate sector consists of a lot of manufacturing industry and derivatives thereof and where corporate indebtedness is even on par with China’s. This contrasts with neighboring Denmark, which has a stronger services industry and considerably lower corporate indebtedness. The point is that the level of corporate indebtedness also depends, i.a., on the structure of the business sector making it more difficult to compare cross-countries. Of course, other factors are also at play.

From the above discussion financial markets’ current focus on woes in Emerging Markets is probably more understandable. But there is actually yet another dimension to what is currently playing out in EMEs. When looking to the quite dramatic rise in non-financial corporate debts, it seems as if it is not just local growth prospects that have contributed but also the massive rise of global liquidity in general, which is true for USD in particular.


The non-bank sector has clearly increased their USD-borrowing quite dramatically, equivalent to 10% of world GDP (ex US). Compare that to an aggregate rise in government and non-financial corporate debt[2] (see graphs above) of around 30% of world GDP and it is clear the currency – USD – exposure has increased massively in the global financial system.

What does this have to do with Paul Romer, you may ask? – Well, in the infamous “mathiness” paper that has divided economists in two camps, Romer attacks the (quantitative) theorization of economics, and advocates a return to a more empirical science based on “natural experiments” such as the financial crisis and subsequent policy actions. Considering the natural experiments Romer cites and how he interprets them, he seems to strongly eschew the concept of ‘neutral money’ (that monetary policy has no long-run effects on the economy). Should our newest Nobel laureate be right, it does not only lend support to Bill White’s argument that I charted out above, it means that we might be looking in the wrong direction (The FED's interest rate hikes) when we should be looking at an ever-decreasing supply of money instead.

Once bitten twice shy in that line of reasoning, I have only one question to you, dear reader: What do you make of current ructions in EMEs and – even more recently – stock markets?


[1] See what I did there? I framed the discussion relative to debt, implying a causality between the great recession / global financial crisis and debt levels, though that is not by any means the only or perhaps even the most important root cause. Shame on me.

[2] I wanted to exclude households as mortgage debts are seldom financed in foreign currencies.


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We don’t usually have views and opinions about economic and financial states of affairs, (not ones that we express publicly as a company, anyway). We do believe, however, that people can and do appreciate a variety of perspectives. What you’ve just read is the perspective of our resident chief economist. While we think he’s very smart, Macrobond Financial does not expressly endorse the views he presents here. And, as the old adage goes, you shouldn’t believe everything you read (not without finding the data, performing a few analyses and presenting it in a nice chart). We want to make it clear that we are not offering this information as investment advice. That being said, if you have the application you can easily check everything that’s mentioned here, and decide for yourself. If you don’t have the application, now you have a great reason to get it.