Macroeconomic Analysis. by Lacy H. Hunt, Ph.D.

Transcription

1 Macroeconomic Analysis by Lacy H. Hunt, Ph.D Bee Caves Road Building 2, Suite 100 Austin, Texas Fax

2 Characteristics of Extremely Over-Indebted Economies 1. Transitory spurts in economic growth, inflation and high-grade bond yields cannot be sustained because debt is too much of a constraint on economic activity. Debt repayment depresses spending as the very high levels of debt reflect too much unproductive and counterproductive debt that is unable to generate the income stream to repay principal and interest. 2. Due to inherently weak aggregate demand, economies are subject to structural downturns without the typical cyclical pressures such as rising interest rates, inflation and exhaustion of pent up demand. 3. Deterioration in productivity is not inflationary but just another symptom of the controlling debt influence. 4. Monetary policy is largely irrelevant. Short-term interest rates fall to approximately zero, thus eliminating the Fed's ability to reduce them any further. In a non-debt constrained economy the Fed has the capacity, with lags, to exercise control over money and velocity, but when the debt overhang is excessive, the Fed looses control over both money and velocity. Other possible channels of monetary policy do not produce longer-term benefits. 5. Inflation falls dramatically, increasing the risk of deflation. Deflation greatly increases the instability of high indebtedness since the borrower has to pay back in harder dollars, which transfers income and wealth from borrowers and creditors. 6. Treasury bond yields fall to extremely lower levels since the Fisher equation ( ) states that the long risk-free yield is equal to the real yield plus expected inflation. page 1

3 2 2 Nominal GDP year over year % change, quarterly Q4 to Q4 % change (A) (B) (C) Nominal GDP 4.6% 3.7% Real GDP 3.1% '04 '11 Source: Bureau of Economic Analysis. Through Q page 2

4 GDP Implicit Price Deflator percent change in annual average % 16% 12% 12% 8% 8% % -8% -12% -12% -16% % Sources: Federal Reserve Board, Bureau of Economic Analysis, N.S. Balke & R.J. Gordon, C.D. Romer. Through Q page 3

5 1 Average Hourly Earnings year over year percent change, monthly 1 8% 8% 6% 6% 2% 2% '01 '03 '05 '07 '09 '11 '13 '15 Source: Bureau of Labor Statistics. Production and nonsupervisory workers, total private industries. Through March page 4

6 Long Term Treasury Rate Monthly average (black line) 203 bps 115 bps 151 bps bps 97 bps 104 bps 201 bps Annual average (blue line) 131 bps '00'01'02'03'04'05'06'07'08'0910'11'12'13'14'15 Source: Federal Reserve. Through Q page 5

7 2. Real Per Capita GDP Growth, Selected Periods average annual growth Real Per Capita GDP decade average growth % 3% 3% 2. 2% 2% 1. 1% % Sources: Bureau of Economic Analysis, Congressional Budget Office, Office of Management and Budget, N.S. Balke & R.J. Gordon, C.D. Romer, Measuring Worth. Through Q page 6

8 U.S. Private and Public Debt as a % of GDP annual Current total debt = $63.5 trillion Debt/GDP of 189. would require total debt of $33 trillion Debt/GDP of 171% would require total debt of $29.8 trillion Real GDP avg. growth: % % Difference between and equals 1.7% Panic Year 1873 Panic Year avg. = 189. Panic Year avg. = 171% Sources: Bureau of Economic Analysis, Federal Reserve, Congressional Budget Office. Census Bureau: Historical Statistics of the United States Colonial Times to Through Q page 7

9 3 28% 26% 2 22% 2 18% 16% 1 12% 1 8% 6% 2% -2% Personal Saving Rate annual average 1929 level Sources: Bureau of Economic Analysis, Martha L. Olney University of California. Through % 26% 2 22% 2 18% 16% 1 12% 1 8% 6% 2% -2% page 8

10 70 60 Total Private and Public Debt as a % of GDP Major Countries annual Japan U.K Eurozone 40 U.S Australia Canada Source: Bank of Japan, Cabinet Office, Statistics Canada, Federal Reserve, Bureau of Economic Analysis, Office for National Statistics of U.K., Statistical Office of the European Communities, Reserve Bank of Australia. Haver Analytics. Through Q U.S. through Q4. page 9

11 General Government Gross Financial Liabilities annual Japan: General Government Gross Financial Liabilities annual United States Euro Area United Kingdom Canada Sources: OECD. Through page 10

12 3% Nonfarm Business Sector: Productivity 4 year % change a.r., quarterly 58 Thousands levels Thousands Real Median Household Income annual % 2% Avg. 2% 1% 1% -1% -1% '00 '03 '06 '09 '12 '15 Sources: Census Bureau. Bureau of Labor Statistics. Through Q Real Median HH Income through page 11

13 The Now Inoperative Channels of Monetary Policy Or Why Monetary Policy Options Are Exhausted First, price effects, or changes in short-term interest rates, are no longer available because these rates are all at or very near the zero band. This is a result of the deflationary consequences of extreme levels of debt. Second, quantity effects also don t work when debt levels are excessive. Central banks can expand the monetary base, but this has little or no impact on money growth. Money, regardless whether one follows Milton Friedman (the Monetarist), James Tobin (the Keynesian) or von Mises (the Austrian), is spendable funds in the hands of businesses and individuals that serves the medium exchange, unit of account and store of value functions. The currency, or least important component of the monetary base, serves this function, but its size is too small. Third, central banks do not control the velocity of money, which declines when there is too much debt and too much of the wrong type of debt. Fourth, the wealth effect is a theoretical possibility, but the empirical evidence overwhelming indicates the effect is minimal if it is operative at all. Fifth, monetary policy can be used to devalue a country s currency, but this benefit is short-lived, and to the extent that it works conditions in other countries are destabilized causing efforts at currency devaluation to invoke retaliation. page 12

14 The Two Components of the Monetary Base: Total Reserves of U.S. Depository Institutions and Currency bil. monthly level Excess Reserves: red line Monetary Base: orange line Total Reserves: black line Currency: blue line '02 '05 '08 '11 '14 Source: Federal Reserve Board. Through March 18, Currency through March 16. bil page 13

15 M2 Money Stock annual % change Avg. = 6.6% Sources: Federal Reserve Board. Bureau of Labor Statistics; Monetary Statistics of the United States. Through page 14

16 2.25 Velocity of Money Equation of Exchange: GDP(nominal) = M*V annual 1997 = = avg to present = avg to 1983 = = 1.2 GDP = MB*m*V Sources: Federal Reserve Board; Bureau of Economic Analysis; Bureau of the Census; The Amercian Business Cycle, Gordon, Balke and Romer. Through Q Q4 2014; V = GDP/M, GDP = 17.7 tril, M2 = 11.6 tril, V = page 15

17 Japan: M2 annual % change Japan: M2 Velocity annual Average annual decline or trend rate = -2.2% Avg. 7.7% Sources: Bank of Japan, Haver Analytics. Through December page 16

18 Euro Area: M2 annual % change Euro Area: M2 Velocity annual % % 1.2 Average annual decline or trend rate = -2.6% % % 8% Avg. 8.1% 8% 4.8% Sources: European Central Bank, Haver Analytics. Through December page 17

19 Real Per Capita Personal Consumption Expenditures vs. Real Home Prices Real Per Capita a PCE % change y = x R² = Real Home Prices % change page 18

20 Real Per Capita Personal Consumption Expenditures vs. Real S&P 500 Prices Lagged One and Two Years, (percent changes) Real Per Capita a PCE, % change y = x R² = Real SP 500 Prices, % change Contemporaneous Trend Line y = x R² = page 19

21 Tendencies of Extreme Over-Indebtedness First, great periods of living beyond one s means tend to occur globally even though some countries take the high debt road faster than others. The 1920s and 1930s as well as the span since the late 1990s are characterized by extended global debt. Second, rolling currency devaluations result as countries try to boost economic growth at the expense of others. This process is thwarted by the Nash equilibrium which states that one party cannot take unilateral actions to harm other parties without expecting those hurt to take countervailing measures. Third, the currency devaluations only provide transitory economic benefits to any country. The following passage from The MIT Dictionary of Modern Economics explains beggar-my-neighbor policies as follows: Economic measures taken by one country to improve its domestic economic conditions have adverse effects on other economies. A country may increase domestic employment by increasing exports or reducing imports by devaluing its currency or applying tariffs, quotas, or export subsidies. The benefit which it attains is at the expense of some other country which experience lower exports or increased imports Such a country may then be forced to retaliate by a similar type of measure. Fourth, currency devaluations reinforce disinflationary global conditions. Through the inflationary mechanism, currency devaluations place downward pressure on highest-grade long-term bonds, like US Treasuries. Fifth, historically advanced economies have only cured over-indebtedness by a significant multi-year rise in the saving rate, or austerity. The austerity arose from one of the following: (1)self imposition, (2)external demands or (3) fortuitous circumstances. page 20

22 Wall Street Journal Dollar Index monthly 110 Taper announcement 110 QE1 starts 100 QE2 starts QE3 starts highest since 1/ '01 '05 '09 '13 Source: Wall Street Journal, Haver Analytics. Through March 30, page 21

23 The Currency Wars De facto return of the French franc to the gold standard at a considerably depreciated level in 1926 was a seminal event. The devalued franc improved economic conditions in France as a result of a rising trade surplus, while impairing economic growth elsewhere. 2. These signs were evident from late 1927 when an extremely indebted Australia exhibited increasingly serious problems. Distress then appeared in the Dutch East Indies (now Indonesia), Germany, Finland, Brazil, Poland, Canada and Argentina. In the fall of 1929, economic conditions had begun to erode in the United States, and the stock market crashed in October. 3. In 1929 Uruguay, Argentina and Brazil devalued their currencies and left the gold standard. Australia, New Zealand and Venezuela followed in Through the turmoil from of the late 1920s and early 1930s, the US stayed on the gold standard. As a result, the dollar's value was rising, and the trade account was serving to depress economic activity and transmit deflationary forces from the global economy into the United States. 4. A de facto devaluation of the dollar occurred in the form of the Smoot-Hawley Tariff of 1930, even as the US remained on the gold standard. By contracting imports to the US, this tariff had the same effect as the earlier currency devaluations. Other countries raised tariffs and/or imposed import quotas, effectively equivalent to currency devaluation. 5. In 1931, 17 countries left the gold standard and/or substantially devalued their currencies, most importantly the United Kingdom. Germany did not devalue, but in an undeniably harsh measure they did default on their debt and imposed severe currency controls. 6. In 1932 and early 1933, 11 more countries devalued or left the gold standard. 7. From April 1933 to January 1934, the US devalued the dollar by 59%. 8. China, on a silver standard, was forced to exit in September 1934 and a sharp depreciation of the Yuan resulted. Then in March 1935, Belgium, a member of the gold bloc countries, devalued. In 1936, France, due to massive trade deficits and a large gold outflow, was forced to devalue the franc. Later that year, Italy, another gold bloc member, devalued the gold content of the lira by the identical amount of the US devaluation. 9. By late 1936, Holland and Switzerland, also members of the gold bloc, had also devalued. 10. The process came to end when Germany invaded Poland in September 1939, and World War II began. page 22

24 0.0 bil. Trade Deficit: Goods billions chained 2009$, s.a., monthly net petroleum imports (5 mbpd) / petroleum consumption (19 mbpd) = 26% bil non-petroleum trade deficit trade deficit '00 '02 '04 '06 '08 10 '12 '14 Source: Census Bureau. Through January page 23

25 Crude Oil Production and North American Rig Count monthly Crude oil production: right scale thin line mil. BPD Rig count: left scale thick line '01 '04 '07 '10 '13 Source: Energy Information Administration, Baker Hughes Inc. Through March 27, page 24

26 7% 6% Long-Term Government Bond Yields Starting with Historic Panic Years: Japan 1989, U.S and 1929 Japan 1989 annual average U.S. panic year 1873 = year 1 U.S. panic year 1929 = year 1 Japan panic year 1989 = year 1 7% 6% U.S % U.S U.S % 2% 1% Debt problems resolved in U.S. after 20 years Sources: Federal Reserve Board, Homer & Sylla. Bank of Japan. U.S. line last plot December % 1% page 25

27 Global Consumer Prices y-o-y percent change, monthly 7% 6% 3% 2% 1% -1% -2% -3% '02 '06 '10 '14 Source: Bureau of Labor Statistics, Statistical Office of the European Communities. Through February U.S. (-.03%) Euro Area (-.3%) 7% 6% 3% 2% 1% -1% -2% -3% page 26

28 1 Long Term Treasury Rate annual average Fall of Berlin Wall 1 12% 12% 1 8% Interest rate avg. = 2.8% Inflation rate avg. = 1. Onset of Iron and Bamboo Curtains Interest rate avg. = 5.9% Inflation rate avg. = 3.9% 1 8% 6% 6% avg. = 4.2% 2% Global market Restricted market Sources: Federal Reserve Board, Homer & Sylla, Wall Street Journal. Through December Initial global market period interrupted by WWI. Global market 2% page 27

29 2 Real Yield annual (nominal yield less annual change in GDP deflator) Avg. for period: Rates = 2.8% Inflation = 1. Real yield = 1.8% Avg. for period: Rates = 5.9% Inflation = 3.9% Real yield = 2. Avg. for period: Rates = 5.6% Inflation = 2.2% Real yield = Long term avg.: Rates = 4.2% Inflation = 2.1% Real yield = 2.1% Sources: Federal Reserve Board, Bureau of Economic Analysis, N.S. Balke & R.J. Gordon, C.D. Romer. Through Q (Last plot is January 2015, 30 year bond less y-o-y CPI.) page 28