The economists Reinhart and Rogoff are having to defend their statistical analysis of debt and growth over decades as well as their conclusions.
Some analysts even question whether their "advice that high debt-GDP ratios – particularly above 90 per cent – are harmful to growth" is relevant to countries in the Eurozone.
On the contrary, the negative correlation between excessive external debt and economic growth is all the more critical to the member countries of a customs and currency union such as the Eurozone, who are defenseless, having given away nearly all of their adjustment policy tools.
And the causality is pretty clear, at least to those of us on the front lines rather than in academia: Increasing external debt and other tsunamis of hot-money capital inflows finance persistent and growing trade deficits. Higher imports mean lower GDP. Even imports of capital goods fail to deliver (export-led) growth to the extent that local production loses economies of scale and becomes noncompetitive. And the net exporters are only too eager to recycle their trade surpluses in the form of more “vendor-financing” for more imports, of cars, submarines...
Lacking the correct FX price signals to provide advance warning of the excessive external debt accumulation, whatever the currency of denomination, net importers are lulled into the illusion that external deficits no longer matter, until the creditors impose a sudden stop.
The lack of recognition of the flow of causation from speculative external credit, to external deficits to internal (Government deficits) means that the Eurozone adjustment programs are mis-designed and mis-directed, and thus ineffective. For example, the so-called “bail-outs” have not included the pre-export trade finance revolving lines of credit that were a standard feature of the Latin American debt crisis.
In a customs and currency union, for the weaker member countries, trade deficits are not self-correcting, so they must be kept low. That means that trade surpluses of the net exporters must also converge, and not keep “Testing the Limits of Divergence in the Eurozone".
Word to the wise net exporter / net creditor: If you keep inflating exports sales to weak importers with easy credit, be prepared to take some losses, or to find a rich uncle (ex. the ECB) to bail you out.
Mariana Abrantes de Sousa
PPP Lusofonia
See Record trade surplus tests divergence http://ppplusofoni...a-divergencia.html
Testing the limits of divergence in the Eurozone http://ppplusofonia.blogspot.pt/2011/12/eurozone-crisis-tests-limits-of.html
Reinhart and Rogoff response http://blogs.ft.com/ftdata/2013/04/17/the-reinhart-rogoff-response-i/
The article in the Economist http://www.economist.com/blogs/freeexchange/2013/04/debt-and-growth#comments
and PPP Lusofonia comments in the Economist https://www.economist.com/users/mica10_0/comments
Some analysts even question whether their "advice that high debt-GDP ratios – particularly above 90 per cent – are harmful to growth" is relevant to countries in the Eurozone.
On the contrary, the negative correlation between excessive external debt and economic growth is all the more critical to the member countries of a customs and currency union such as the Eurozone, who are defenseless, having given away nearly all of their adjustment policy tools.
And the causality is pretty clear, at least to those of us on the front lines rather than in academia: Increasing external debt and other tsunamis of hot-money capital inflows finance persistent and growing trade deficits. Higher imports mean lower GDP. Even imports of capital goods fail to deliver (export-led) growth to the extent that local production loses economies of scale and becomes noncompetitive. And the net exporters are only too eager to recycle their trade surpluses in the form of more “vendor-financing” for more imports, of cars, submarines...
Lacking the correct FX price signals to provide advance warning of the excessive external debt accumulation, whatever the currency of denomination, net importers are lulled into the illusion that external deficits no longer matter, until the creditors impose a sudden stop.
The lack of recognition of the flow of causation from speculative external credit, to external deficits to internal (Government deficits) means that the Eurozone adjustment programs are mis-designed and mis-directed, and thus ineffective. For example, the so-called “bail-outs” have not included the pre-export trade finance revolving lines of credit that were a standard feature of the Latin American debt crisis.
In a customs and currency union, for the weaker member countries, trade deficits are not self-correcting, so they must be kept low. That means that trade surpluses of the net exporters must also converge, and not keep “Testing the Limits of Divergence in the Eurozone".
Word to the wise net exporter / net creditor: If you keep inflating exports sales to weak importers with easy credit, be prepared to take some losses, or to find a rich uncle (ex. the ECB) to bail you out.
Mariana Abrantes de Sousa
PPP Lusofonia
See Record trade surplus tests divergence http://ppplusofoni...a-divergencia.html
Testing the limits of divergence in the Eurozone http://ppplusofonia.blogspot.pt/2011/12/eurozone-crisis-tests-limits-of.html
Reinhart and Rogoff response http://blogs.ft.com/ftdata/2013/04/17/the-reinhart-rogoff-response-i/
The article in the Economist http://www.economist.com/blogs/freeexchange/2013/04/debt-and-growth#comments
and PPP Lusofonia comments in the Economist https://www.economist.com/users/mica10_0/comments
Da dívida à depressão económica: causalidade ou mera correlação?
ResponderEliminarA correlação negativa entre a dívida externa excessiva e ocrescimento econômico é ainda mais crítico para os países membros de uma união aduaneira e monetária como a Eurozone, países que ficaram indefesos, tendo cedido quase todos os seus instrumentos de ajustamento económico.
E a causalidade é bastante clara para nós que estamos na linhas da frente: O aumento da dívida externa e outros tsunamis de fluxos de capital financiam os défices comerciais persistentes e crescentes. Importações mais elevadas significam PIB inferior. Mesmo as importações de bens de capital não fomentam o crescimento na medida em que a produção local perde economias de escala e torna-se não-competitiva.
E os países exportadores estão sempre prontos a reciclar seus superávits comerciais na forma de mais "vendor-financing" para mais importações, de carros, submarinos ...
Faltando os sinais cambiais corretos para fornecer alertas antecipados da acumulação da dívida externa excessiva, os importadores líquidos embarcam na ilusão de que os défices externos já não são importantes, até ao momento que os credores cortam o crédito.
A falta de reconhecimento do fluxo de causalidade do crédito externo especulativo, para o déficit externo e depois para o défice interno (oçamental) significa que os programas de ajuste da Eurozone estão mal-desehads e mal direccionados, e que serão, portanto, ineficazes.
Por exemplo, os chamados "bail-outs" não ter incluído as linhas de financiamento à pré-exportação que caracterizaram a resposta à crise da dívida latino-americana.
Numa união aduaneira e monetária, não há auto-correcção dos défices comerciais dos países membros mais fracos, por isso devem ser mantidos bastante baixos. Isso significa que os superávits comerciais dos exportadores líquidos também devem convergir, e não ficar "testando os limites de divergência", com as tristes consequências actuais.
Da dívida à depressão económica: causalidade ou mera correlação?
ResponderEliminarA correlação negativa entre a dívida externa excessiva e ocrescimento econômico é ainda mais crítico para os países membros de uma união aduaneira e monetária como a Eurozone, países que ficaram indefesos, tendo cedido quase todos os seus instrumentos de ajustamento económico.
E a causalidade é bastante clara para nós que estamos na linhas da frente: O aumento da dívida externa e outros tsunamis de fluxos de capital financiam os défices comerciais persistentes e crescentes. Importações mais elevadas significam PIB inferior. Mesmo as importações de bens de capital não fomentam o crescimento na medida em que a produção local perde economias de escala e torna-se não-competitiva.
E os países exportadores estão sempre prontos a reciclar seus superávits comerciais na forma de mais "vendor-financing" para mais importações, de carros, submarinos ...
Faltando os sinais cambiais corretos para fornecer alertas antecipados da acumulação da dívida externa excessiva, os importadores líquidos embarcam na ilusão de que os défices externos já não são importantes, até ao momento que os credores cortam o crédito.
A falta de reconhecimento do fluxo de causalidade do crédito externo especulativo, para o déficit externo e depois para o défice interno (oçamental) significa que os programas de ajuste da Eurozone estão mal-desehads e mal direccionados, e que serão, portanto, ineficazes.
Por exemplo, os chamados "bail-outs" não ter incluído as linhas de financiamento à pré-exportação que caracterizaram a resposta à crise da dívida latino-americana.
Numa união aduaneira e monetária, não há auto-correcção dos défices comerciais dos países membros mais fracos, por isso devem ser mantidos bastante baixos. Isso significa que os superávits comerciais dos exportadores líquidos também devem convergir, e não ficar "testando os limites de divergência", com as tristes consequências actuais.
What confuses me, given my direct experience as an international banker in the Latin American debt crises and now in Portugal's debt crisis, is the persistent disclaimers about "correlation does not imply causality".
ResponderEliminarFrom where I sit in Lisbon, the causality is painfully clear.
This may be because the studies look mostly at public debt, while what really matters for growth is external debt and the corresponding external imbalances.
When the next 100 academic articles and PhD theses are written about the Eurozone debt crisis and the diverging fortunes of the Eurozone member countries, I expect to see some of the following conclusions:
1. Of the all missing adjustment policy instruments within the EU (FX devaluations, import tariffs, monetary policy), the most critical missing policy tool will have proven to be capital controls, allowing the small countries to be overwhelmed by tsu-moneys
2. Regulatory failure by the (im)prudential regulators such as the National Central Banks such as the Bundesbank, the Bank of England, the NCB, the Swiss Central Bank, which under county rule allowed their banks to reach leverage ratios of 50X.
Etc...
It's very good to review the data and to discuss the conclusions about causality and thresholds, especially from a safe distance in the ivory towers.
ResponderEliminarBut first I would invite these esteemed academics to walk the next 5 years in the shoes of the Portuguese taxpayers, to really FEEL THE RISK threshold where too much external debt threatens freedom .
The chain of causality between debt and depression is even simpler:
ResponderEliminarHigher Government debt now requires higher tax revenues later, usually through higher tax rates. Tighter fiscal in the future implies lower, perhaps even negative, growth in the future.
Unless you are the USA and China keeps buying T-bonds ad infinitum.
To the question of how much Government debt is TOO MUCH and will provoke a depression (when YOU lose YOUR job), here is another question: Do you really want to find out?