2. Debt & Deficits – Credit & Surpluses Debt and Credit – cumulative stock variables – relationship debtors and creditors "joined at the hip" (Atwood) debtors and creditors "joined at the hip" (Atwood) – debt: topic of discomfort allegedly greater discomfort in some cultures allegedly greater discomfort in some cultures eg Germany versus English-speaking countries eg Germany versus English-speaking countries – debt: topic of confusion country's debt; national debt; public debt country's debt; national debt; public debt Deficits (D) and Surpluses (S) – flow variables – accounting identity: total surpluses = total deficits (S=D) S + (-D) = 0: sum of all sectoral balances equals zero S + (-D) = 0: sum of all sectoral balances equals zero a deficit is an addition to debt or a reduction of credit a deficit is an addition to debt or a reduction of credit

3. Sectors Global Economy – governments (public) and others (private) private includes corporate and household private includes corporate and household two sectors: one degree of freedom two sectors: one degree of freedom – private sector balance: negative of government surpluses global government sector almost always in deficit global government sector almost always in deficit see next slide for 2001 to 2010 global balances see next slide for 2001 to 2010 global balancesnext slidenext slide – interpretation economists commonly think of 'crowding out' economists commonly think of 'crowding out' – implies autonomous government; accommodating private sector – untenable interpretation post 2008 governments have 'intelligence' to accommodate governments have 'intelligence' to accommodate – called counter-cyclical fiscal policy

4. Global Intersectoral Balances

5. Sectors National Economy – Foreign sector; Government sector; Private sector two degrees of freedom two degrees of freedom foreign balance is negative of current account balance foreign balance is negative of current account balance example profiles: Japan, USA, UK and Germany example profiles: Japan, USA, UK and Germany possible for some countries to have positive G and P possible for some countries to have positive G and P – but not all ! – such, if long term, would be an ideal 'mercantilist' position Australasia: New Zealand and Australia – commonly classed as debtor-deficit economies, like USA Nordic Countries: Sweden, Norway, Denmark, Finland, Iceland

6. Japan

7. United States

8. United Kingdom

9. Germany

10. Profiles: Aust-NZ vs. Nordics Similar profiles in 1980s – common themes pre-1980s financial 'repression' pre-1980s financial 'repression' rapid finance-sector liberalisation rapid finance-sector liberalisation Australia least rapid liberaliser Australia least rapid liberaliser – financial liberalisation rapid emergence of negative private-sector balances rapid emergence of negative private-sector balances government appears to have crowded out private sector in New Zealand in mid-1980s government appears to have crowded out private sector in New Zealand in mid-1980s substantial financial flow to these private sectors after 1987 in countries with lesser sharemarket crashes; banking crises c.1990 substantial financial flow to these private sectors after 1987 in countries with lesser sharemarket crashes; banking crises c.1990 Contrasting profiles after about 1992

11. Australia

12. Sweden

13. Denmark

14. Norway

15. New Zealand

16. Finland

17. Iceland

18. Iceland

19. Extended Profiles since 1992 Nordic Countries – especially Sweden, Denmark, Finland mercantilist 'creditor-surplus' profile mercantilist 'creditor-surplus' profile Sweden Sweden – banks rescued in government equity bail-outs – governments and private sector pursue austerity – strategies accommodated by foreign sector – like Malaysia (especially) after Asian 1997/98 crisisMalaysiaAustralasia – especially New Zealand debtor-deficit private-sector profile debtor-deficit private-sector profile no sign yet of Scandinavian-style crises despite profile no sign yet of Scandinavian-style crises despite profile accommodates foreign surpluses via monetary-policy accommodates foreign surpluses via monetary-policy

20. Malaysia

21. Global Financial Crisis 2008-10 "Balance-sheet recession" (Koo) – autonomous private sector surpluses in corporate and household sectors, through debt-reduction and open-mouth policy accentuating precautionary saving fiscal policy, not zero interest rates, accommodate fiscal policy, not zero interest rates, accommodate – accentuated post-'92 pattern in creditor-surplus countries – reversal in most debtor-deficit economies, incl. Aust.-NZ Post GFC: echoes of 1920s? – return to profiles of last 20 years creates short-run global stabilisation but accentuates long-run financial imbalance – fewer sectors or sub-sectors willing/able to accommodate increased global preference for private surplus balances