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Rebalancing the world economy

The endgame

This Is The Endgame, According To Deutsche Bank
We think the end game is that when the next global recession hits, then QE/zero rate world will be re-appraised.
Perhaps the G20 will get together and decide to try a different approach.
In our 2013 long-term study we speculated how we thought the end game was 'helicopter money'

- ie money printing to finance economic objectives (tax cuts, infrastructure etc).
zerohedge 1 October 2015


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Three years ago to the day, BNP Paribas, the French banking giant, suspended redemptions on three funds, marking the beginning of the credit crunch.
Patrick Allen, CNBC Senior News Editor, 9/8 2010

The collapse of the US subprime market and its knock-on effects of the mortgage-backed securities market began a series of crisis that have come close to bringing the global economy to its knees.

Three years later, it appears the world remains clouded by uncertainty. Unprecedented actions by central banks and governments across the world have averted a melt-down in the global economy but commentators say we are not out of the woods yet.

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Skall 8/10 bli lika känt som 9/11 ?
Rolf Englund blog, 10 augusti 2007

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The Debt Supercycle
I have been writing about The End Game for some time now.
And writing a book of the same title.
John Mauldin 17/7 2010

When I mention The End Game, you'll immediately want to know what is ending. What I think is ending for a significant number of countries in the "developed" world is the Debt Supercycle. The concept of the Debt Supercycle was originally developed by the Bank Credit Analyst. It was Hamilton Bolton, the BCA founder, who used the word supercycle, and he was referring generally to a lot of things, including money velocity, bank liquidity, and interest rates.

There is a limit to how much debt you can pile on. But as the work of Reinhart and Rogoff points out (This Time Is Different), there is not a fixed limit or some certain percentage of GNP. Rather, the limit is all about confidence, a theme I have written on many times. Everything goes along well, and then "Boom!" it doesn't. That "Boom" has happened to Greece. Without massive assistance, Greek debt would be unmarketable. Default would be inevitable. (I still think it is!)

It's all well and good to say that you want fiscal rectitude. It's another thing when it is hitting budgets near and dear to you. And to get back to a remotely sustainable deficit is going to take pain in every corner. It is going to hit near you, gentle reader. Some will get hit harder than others.

And this is the case in every country running large and out-of-control deficits. It is not just a US problem. The Irish are in what can only be called a depression, along with the Baltic states and Hungary. Greece will soon be there, once they have to meet market rates for their debt, or force their labor markets to endure a very serious deflation to make themselves more competitive.

Inflation has been the traditional method of default for many countries over the years. Instead of outright default, they simply inflate away debt. And the logic is compelling.

If you have 5% inflation along with 3% real growth, you get a nominal growth rate of 8%. That means in nine years the economy is twice the size in dollar terms, but only about 35% bigger in inflation-adjusted terms. If somewhere along the way you can get your deficits down to "just" 3%, then you can reduce your debt-to-GDP ratio by 5% a year. In less than ten years, you cut your debt-to-GDP ratio in half. Sounds good, right?

Of course, you have destroyed the purchasing power of your currency, given a real hit to the incomes of the middle class, defrauded those who bought your debt, and in all likelihood you did not hold inflation to just 5%. Think the '70s.

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Comment by Rolf Englund
But if all countries try to save at the same time, how do we escape depression?
How do we get out of this scenario alive?
Rolf Englund, Financial Times 4/10 2005

Rebalancing - Stabiliseringspolitik

The Fed minutes warned of "significant downside risks" and a possible slide into deflation, an admission that zero interest rates, $1.75 trillion of QE, and a fiscal deficit above 10pc of GDP have so far failed to lift the economy out of a structural slump.
"The Committee would need to consider whether further policy stimulus might become appropriate if the outlook were to worsen appreciably," it said. The economy might not regain its "longer-run path" until 2016.
"The Fed is throwing in the towel," said Gabriel Stein, of Lombard Street Research. "They are preparing to start QE again. This was predictable because the M3 broad money supply has been contracting for months."
Ambrose Evans-Pritchard, 15 July 2010

A study by the San Francisco Fed said the interest rates need to be –4.5pc to stabilise the economy under the Fed's "rule of thumb". Since this is impossible, massive QE needs to make up the difference.

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There is undeniably a risk that tightening policy too early will cause the economy to dip back into recession. But ...
In the view of The Times, the balance of risks suggests that policymakers should begin to withdraw the stimulus.
The Times editorial, July 2 2010

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Anybody who looks carefully at the world economy will recognise that
a degree of monetary and fiscal stimulus
unprecedented in peacetime is all that is prodding it along

The conventional wisdom is that it will also be possible to manage a smooth exit.
Nothing seems less likely. So let us consider the endgame, instead.
Martin Wolf, FT February 23 2010

The private sector is now spending far less than its aggregate income.

Forecasts in the Organisation for Economic Co-operation and Development’s latest Economic Outlook imply that in six of its members (the Netherlands, Switzerland, Sweden, Japan, the UK and Ireland) the private sector will run a surplus of income over spending greater than 10 per cent of gross domestic product this year

Note that such huge shifts towards frugality will have occurred, despite the unprecedented monetary loosening.

If governments had tried to close fiscal deficits, as they attempted to do in the 1930s, we would be in another Great Depression.

So how do we exit? To answer the question, we need to agree on how we entered.

William White, former chief economist of the Bank for International Settlements, is a leading proponent of the view that monetary policy errors, particularly by the Federal Reserve, have driven the world economy. Richard Duncan offers a similar, but more radical, critique in his thought-provoking new book, The Corruption of Capitalism.

By “success”, I mean reignition of the credit engine in high-income deficit countries.
Unhappily, the result of what I call success would probably be a still bigger financial crisis in future.

I can envisage two ways by which the world might grow out of its debt overhangs without such a collapse:
a surge in private and public investment in the deficit countries or
a surge in demand from the emerging countries.

Unfortunately, nobody is seized of such a radical post-crisis agenda.
Most people hope, instead, that the world will go back to being the way it was.

Let us not repeat past errors. Let us not hope that a credit-fuelled consumption binge will save us.

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Martin Wolf

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This is the endgame for the global imbalances
If the surplus countries do not expand domestic demand relative to potential output, the open world economy may even break down.
As in the 1930s, this is now a real danger.
Martin Wolf, Financial Times, December 2 2008

In 2008, according to forecasts from the International Monetary Fund, the aggregate excess of savings over investment in surplus countries will be just over $2,000bn

The oil exporters are expected to generate $813bn. Remarkably, a number of oil-importing countries are also expected to generate huge surpluses.
Foremost among them are China ($399bn), Germany ($279bn) and Japan ($194bn).

In 2008 the big deficit countries are, in order, the US, Spain, the UK, France, Italy and Australia.
The US is far and away the biggest borrower of them all.

In normal times, current account surpluses of countries that are either structurally mercantilist – that is, have a chronic excess of output over spending, like Germany and Japan – or follow mercantilist policies – that is, keep exchange rates down through huge foreign currency intervention, like China – are even useful.
In a crisis of deficient demand, however, they are dangerously contractionary.

In short, if the world economy is to get through this crisis in reasonable shape, creditworthy surplus countries must expand domestic demand relative to potential output.
How they achieve this outcome is up to them.

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Martin Wolf

Let dollar fall or risk global disorder
Is it possible to reduce the US deficit substantially without exchange-rate changes? The answer is that it would be possible, but catastrophic for all participants,
because it would demand a deep US recession
Martin Wolf, Financial Times, May 9 2006