Tag Archives: Debt

Rapid Money Supply Growth Does Not Cause Inflation

Neither do rapid growth in government debt, declining interest rates, or rapid Increases in a central bank’s balance sheet
By Richard Vague – Monetarist theory, which came to dominate economic thinking in the 1980s and the decades that followed, holds that rapid money supply growth is the cause of inflation. The theory, however, fails an actual test of the available evidence. In our review of 47 countries, generally from 1960 forward, we found that more often than not high inflation does not follow rapid money supply growth, and in contrast to this, high inflation has occurred frequently when it has not been preceded by rapid money supply growth.

The purpose of this paper is to present these findings and solicit feedback on our data, methods, and conclusions.

To analyze the issue, we developed a database of 47 countries that together constitute 91 percent of global GDP and looked at each episode of rapid money supply growth to see if it was followed by high inflation. In the majority of cases, it was not. In fact, the opposite was true—a large percentage of the cases of high inflation were not preceded by high money supply growth. These 47 countries all rank within the top 70 largest economies as measured by GDP and include each of the top 20 countries. If a country was not included, it was because we could not get a complete enough set of historical data on that country.

There are several reasons to want to better understand the causes of inflation. Currently, central banks in Japan, Europe and elsewhere are trying to engender a moderately higher level of inflation in order to stave off the drift toward deflation and under the belief that it will add to job and economic growth. Also, both public and private debt have reached such high levels in ratio to GDP that some policymakers are beginning to reflect on potential paths to deleveraging, and inflation is one such path. Lastly, a number of countries are trying to moderate levels of inflation that are deemed too high. For these countries, too, a deeper understanding of the mechanisms of inflation is important. more>

Finance Is Not the Economy

An economy based increasingly on rent extraction by the few and debt buildup by the many is a feudal model
By Dirk Bezemer and Michael Hudson – Why have economies polarized so sharply since the 1980s, and especially since the 2008 crisis? How did we get so indebted without real wage and living standards rising, while cities, states, and entire nations are falling into default? Only when we answer these questions can we formulate policies to extract ourselves from the current debt crises. There is widespread sentiment that this crisis is fundamental, and that we cannot simply “go back to normal.” But deep confusion remains over the theoretical framework that should guide analysis of the post-bubble economy.

The last quarter century’s macro-monetary management, and the theory and ideology that underpinned it, was lauded by leading macroeconomists asserting that “The State of Macro[economics] is Good” (Blanchard 2008, 1). Oliver Blanchard, Ben Bernanke, Gordon Brown, and others credited their own monetary policies for the remarkably low inflation and stable growth of what they called the “Great Moderation” (Bernanke 2004), and proclaimed the “end of boom and bust,” as Gordon Brown did in 2007. But it was precisely this period from the mid-1980s to 2007 that saw the fastest and most corrosive inflation in real estate, stocks, and bonds since World War II.

Nearly all this asset-price inflation was debt-leveraged. Money and credit were not spent on tangible capital investment to produce goods and non-financial services, and did not raise wage levels. The traditional monetary tautology MV=PT, which excludes assets and their prices, is irrelevant to this process. Current cutting-edge macroeconomic models since the 1980s do not include credit, debt, or a financial sector (King 2012; Sbordone et al. 2010), and are equally unhelpful. They are the models of those who “did not see it coming” (Bezemer 2010, 676).

In this article, we present the building blocks for an alternative. This will be based on our scholarly work over the last few years, standing on the shoulders of such giants as John Stuart Mill, Joseph Schumpeter, and Hyman Minsky. more>

Updates from Chicago Booth

Don’t kill a company to collect a debt
By Emily Lambert – There’s a sizable gap between what a company is worth in liquidation and what it’s worth while still operating, according to University of California at Berkeley’s Amir Kermani and Chicago Booth’s Yueran Ma. Companies going through Chapter 11 restructuring are worth about twice as much when they are going concerns rather than liquidated, they write.

The finding is part of a larger study of corporate debt, in which Kermani and Ma examine the size and composition of the debt loads held by nonfinancial companies. They distinguish between asset-based debt (issued against discrete assets) and cash flow–based debt (issued against the operating value of a company). In doing so, they wondered about companies’ cash-flow and asset values—essentially, how much more a company might be worth alive rather than dead.

It took the researchers more than a year to amass the data needed to answer the question. They hand-collected information from 387 public, nonfinancial companies that filed for Chapter 11 restructuring between 2000 and 2016, plus pulled from other databases including Compustat.

Assessing the value of assets took quite a bit of effort, Ma says. She and Kermani were able to find comprehensive appraisals that were disclosed in court cases. They also performed extensive checks using data from other sources. more>

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Updates from McKinsey

What’s keeping you from divesting?
Active portfolio management can create significant competitive advantages. Still, executives routinely shy away from separations. Here are six common roadblocks and some tips for breaking through.
By Gerd Finck, Jamie Koenig, Jan Krause, and Marc Silberstein – You’ve taken a close look at your portfolio and identified the assets that are no longer strategic priorities. Now what? Logic would dictate that you kick off a divestiture process—that is, you would convene a deal team to define key process steps in the separation and then market the assets in question to potential buyers.

A recent survey of business leaders, however, confirms that this process gets abandoned more often than not, for a variety of reasons—among them, senior management’s perceptions that disentangling the assets will be too complicated or that there will be few interested buyers. Executives and boards often fear that divestitures will reduce the size of a company in ways that will make it difficult to replace earnings.

Such fears are often unfounded. In fact, research continues to mount in favor of active portfolio management, in which companies constantly redeploy their capital toward areas of the business where industry dynamics and their competitive advantages maximize returns on invested capital (ROIC). A recent McKinsey study shows that among companies in the sample, the 23 percent that regularly refresh 10 to 30 percent of their portfolios through acquisitions and divestitures outperform the others in total returns to shareholders (TRS) by an average of 5.2 percent a year.

A recent survey of 128 senior business leaders helped us pinpoint the most common obstacles to divestitures. Executives said one or more of the following six concerns had prevented them from pursuing a divestiture in the past ten years: misperceptions of asset value, underestimating buyer interest, concerns about damage to the rest of the business, concerns about timing, fear of sunk costs, and emotional attachment to the asset (Exhibit 1). With 52 percent of the respondents also indicating that they expect to conduct divestitures in the next 18 months (Exhibit 2), now is the time to confront these challenges. In this article, we take a close look at each obstacle and suggest possible moves business leaders can take to overcome them. more>

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The Chinese way

By Lena Deros – The Chinese as people have proven to be very creative and have given the world many things that we use today, including silk, gunpowder, porcelain, and other more specialized items were initially produced in China.

There is also a rumor in some theoretical historical and political analyses that the Chinese have never tried to conquer or take over other nations as other countries have done in the past.

But how true is that theory?

Our research, based on a comprehensive new data set, shows that China has extended many more loans to developing countries than previously known. This systematic underreporting of Chinese loans has created a “hidden debt” problem – meaning that debtor countries and international institutions alike have an incomplete picture on how much countries around the world owe to China and under which conditions.

In total, the Chinese state and its subsidiaries have lent about $1.5 trillion in direct loans and trade credits to more than 150 countries around the globe. This has turned China into the world’s largest official creditor — surpassing traditional, official lenders such as the World Bank, the IMF, or all OECD creditor governments combined.

Despite the large size of China’s overseas lending boom, no official data exists on the resulting debt flows and stocks. China does not report on its international lending and Chinese loans literally fall through the cracks of traditional data-gathering institutions.

Credit rating agencies, such as Moody’s or Standard & Poor’s, or data providers, such as Bloomberg, focus on private creditors, but China’s lending is sponsored by the Communist Party, and therefore off their radar. Debtor countries themselves often do not collect data on debt owed by state-owned companies, which are the main recipients of Chinese loans. In addition, China is not a member of the Paris Club (an informal group of creditor nations) or the OECD, both of which collect data on lending by official creditors. more>

The approaching debt wave

By Kaushik Basu – Over the last decade, the world economy has experienced a steady build-up of debt, now amounting to 230 percent of global GDP. The last three waves of debt caused massive downturns in economies across the world.

The first of these happened in the early 1980s. After a decade of low borrowing costs, which enabled governments to expand their balance sheets considerably, interest rates began to rise, making debt-service increasingly unsustainable. Mexico fell first, informing the United States government and the International Monetary Fund in 1982 that it could no longer repay. This had a domino effect, with 16 Latin American countries and 11 least-developed countries outside the region ultimately rescheduling their debts.

In the 1990s, interest rates were again low, and global debt surged once more. The crash came in 1997, when fast-growing but financially vulnerable East Asian economies—including Indonesia, Malaysia, South Korea, and Thailand—experienced sharp growth slowdowns and plummeting exchange rates. The effects reverberated worldwide.

But it is not only emerging economies that are vulnerable to such crashes, as America’s 2008 subprime mortgage crisis proved. By the time people figured out what “subprime” meant, the U.S. investment bank Lehman Brothers had collapsed, triggering the most severe crisis and recession since the Great Depression.

The World Bank has just warned us that a fourth debt wave could dwarf the first three. Emerging economies, which have amassed a record debt-to-GDP ratio of 170 percent, are particularly vulnerable. As in the previous cases, the debt wave has been facilitated by low interest rates. There is reason for alarm once interest rates begin to rise and premia inevitably spike.

Among emerging economies, India is especially vulnerable. In the 1980s, India’s economy was fairly sheltered, so the debt wave back then had little impact.

Today, India’s economy is facing one of its deepest crises in the last 30 years, with growth slowing sharply, unemployment at a 45-year high, close to zero export growth over the last six years, and per capita consumption in the agricultural sector decreasing over the last five years. Add to this a deeply polarized political environment and it is little wonder that investor confidence is rapidly declining. more>

Why the recent debt buildup is a concern

By Peter Nagle – Since 2010, debt in emerging market and developing economies has grown to record highs.  Current low interest rates —which markets expect to be sustained in the medium term—appear to mitigate some of the risks associated with high debt. However, emerging market and developing economies (EMDEs) also face weak growth prospects, mounting vulnerabilities, and elevated global risks. A menu of policy options is available to reduce the likelihood of the current debt wave ending in crises and, if crises were to take place, to alleviate their impact.

Global debt reached a record-high of about 230 percent of global GDP in 2018.  Total EMDE debt also reached an all-time high of about 170 percent of GDP in 2018, an increase of 54 percentage points of GDP since 2010.

Over the past fifty years, there have been four historical waves of debt accumulation:  1970-89, 1990-2001, 2002-09, and since 2010. The latest wave, which started in 2010, has been the largest, fastest and most broad-based increase of the four.

Rapid increases in debt are common among EMDEs. Between 1970 and 2009, the sector accumulating debt shifted from the public to the private sector. However, since 2010, both governments and private sectors have rapidly accumulated debt. more>

Updates from Chicago Booth

Does America have an antitrust problem?
Markets are becoming more concentrated—and, arguably, less competitive
By Jeff Cockrell – To those who are worried about the state of contemporary American politics—those who are concerned about the historically high levels of polarization between the two main political parties, who despair of the disappearance of anything that could be called common ground, who bristle at the apparent unwillingness of any occupant of national, state, or local office to recognize the common sense or basic human decency of any proposal coming from the opposite side of the aisle—we offer you this single harmonious word of relief: antitrust.

A vocal concern for the power held by some of the United States’ most dominant companies—especially tech giants such as Facebook, Amazon, and Google—may be the only shared material among the talking points of President Donald Trump and the Democrats vying to run against him in 2020. Trump has asserted that the US should follow the European Union’s lead in handing down large fines to big tech companies for antitrust violations, and during his presidential campaign, he charged that Amazon has a “huge antitrust problem.” A number of prominent Democrats, including Bernie Sanders and Elizabeth Warren, are on the same page, having suggested that many such companies may need to be broken up. In July, the Department of Justice (DOJ) announced that it was “reviewing whether and how market-leading online platforms have achieved market power and are engaging in practices that have reduced competition, stifled innovation, or otherwise harmed consumers.”

Concerns about competition are not unique to the tech industry. Aggregate levels of US industrial concentration—or how market share is divided among manufacturing companies—began to increase in the early 1980s after decades of relatively little change, according to research by Chicago Booth’s Sam Peltzman. The trend continued into the 21st century. Between 1987 and 2007, average concentration—as measured by the Herfindahl-Hirschman index, a commonly used gauge of market concentration—within the 386 industries included in his analysis increased by 32 percent.

If this trend toward more-concentrated industries has been accompanied by a small number of companies expanding their market power as a result of diminished competitive pressures, the effects could be momentous. In fact, some research suggests the exercise of market power could be responsible for everything from higher prices to reduced investment to the steadily diminishing share of the US economy that’s enjoyed by the labor force. more>

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Ending short-termism by keeping score

By Klaus Schwab – As finance ministers gather in Washington, DC, for the World Bank and International Monetary Fund’s annual meetings, they will face no shortage of urgent matters to discuss. Fears of a global recession, the US-China trade war, the fallout of the Brexit talks, and a dangerous debt overhang make this the most stressful economic juncture in a decade. These issues must be discussed, and we should all hope that they can be resolved with minimal damage.

All of this assumes an end to the economic short-termism that underpins policymaking today. For that, we should develop scorecards to track our performance on these long-term priorities. To that end, I have three suggestions.

First, we need to rethink GDP as our “key performance indicator” in economic policymaking.

Second, we should embrace independent tracking tools for assessing progress under the Paris agreement and the SDGs (United Nations Sustainable Development Goals).

Third, we must implement “stakeholder capitalism” by introducing an environmental, social, and governance (ESG) scorecard for businesses.

On the first point, we desperately need to change our overall economic frame of reference. For 75 years, the world marched to the beat of the drum called “Gross Domestic Product.” Now, we need a new instrument. GDP gained traction when economies were primarily seen as vehicles for mobilizing wartime production. Yet today’s economies are expected to serve an entirely different purpose: maximizing wellbeing and sustainability.

It is time to consider a new approach. A group of economists from the private sector, academia, and international institutions, including Diane Coyle and Mariana Mazzucato, has already been working on alternate measures and ways to correct for the failings of GDP.

Their Wealth Project, which evolved from efforts initiated by the World Bank, has offered a number of proposals for how we can move forward. more>

How to Survive a Recession: 12 Steps You Should Take Now to Protect Your Money

By Diane Harris – “The global economy is facing increasingly serious headwinds,” said OECD chief economist Laurence Boone. “An urgent response is required.”

It shouldn’t exactly come as a surprise then that the latest Gallup poll found about half of Americans now believe that a recession in the next year is likely—a more pessimistic reading than the survey found 12 years ago, just two months prior to the start of the Great Recession.

Even more affluent households are often cash-strapped. Among those making $85,000 or more—the top 25 percent of the income range—the typical family only has enough in liquid savings to replace 40 days of income.

If a recession hits, what would your biggest financial problem be? Taking steps to address that pain point now will make your life a lot easier if trouble comes.

“Your emotions are your best clue,” says Stephanie McCullough. “What stresses you out the most—credit card debt, the feeling that you’re spending beyond your means? Whatever the little nagging voice in your head is telling you is what you should tackle first.”

These moves address the most common contenders for many families.

  1. Pay down the plastic
  2. Earmark spending cuts
  3. Get a check-up

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