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92 Deleveraging, What Deleveraging the view that the currency denomination of debt is crucial and pointed to the report’s analyses of this issue, particularly in the case of China. Afternoon discussion Laurence Boone, Bank of America Merrill Lynch Laurence Boone pointed out how late the process of deleveraging has started, largely spurred by new regulation. In Germany it began in 2012, and similarly in France, where most of the deleveraging in banks is happening through the sale of assets. In Spain and Italy, it started very recently through the sale of loans. New regulation seems to have spurred this deleveraging. Still, it has not yet happened in any significant way. According to a recent ECB study, differences between Europe and the US are small as far as non-financial corporate sector debt (measured as a percentage of GDP) is concerned. This stands in contrast with the report. It is not appreciated enough how differences in bankruptcy laws in Europe and the US affect household deleveraging. In the US, it is relatively simple for a household to default on a mortgage and to walk away from a home, while in Europe the household’s entire wealth is wiped out before it defaults on a mortgage. Similarly, corporate bankruptcy law in Europe makes it harder to recognise loses and this has an impact on deleveraging, innovation and growth. Finally, the monetary policy stance has been much less expansionary in the Eurozone than in the US. When associated with non-financial corporation deleveraging, the result is a fall in inflation, which then negatively affects the ability to pay back debt. This is an important implication of the currently low inflation environment in the Eurozone. Kiyohiko Nishimura, University of Tokyo Kiyohiko Nishimura focused on demography. He argued the following: • The demographic bonus has been the source of excessive optimism in the large developed countries. • The emergence of bubbles and the subsequent crisis have been driven by the demographic change. • The continuation of demographic change heralds a period of low growth. A large working-age population relative to the non-working-age population offers a demographic bonus and the unemployment rate is kept relatively low and stable. Output exceeds what it takes to feed the population, leaving room for discretionary consumption and future investment. The developed economies benefitted from a baby boom, medical advancements lowering infant mortality and prolonging life expectancy, and global post-World War II stability. The slow-
Discussions 93 moving demographic change under way contributed to excessively optimistic expectations of a prosperous society. In the Anglo-Saxon countries, as well as in Europe and Japan, crises have roughly coincided with a decreasing non-working-age population ratio. Nishimura presented a wealth of data showing this remarkable coincidence. The policy implications of these observations are profound. They imply that we do not observe a financial leverage cycle but a fundamentals-driven adjustment. Policy should not pursue the futile objective of reversing course; rather, it should aim at smoothing the unavoidable adjustment. For instance, QE is sometimes presented as a way of smoothing out the situation in the face of considerable uncertainty, but it could just be a painkiller used to postpone adjustment. Fabio Panetta, Banca d’Italia Fabio Panetta wanted to qualify the report’s assessment that takes the US policy as the benchmark for good policy. The country’s story is a genuine macroeconomic story, which belies a number of risks in financial stability. After 2008, the US authorities reacted boldly to the crisis and the ensuing recession. Economic growth was supported by expansionary fiscal and monetary policies, and an exchange rate depreciation that partly shifted the burden of adjustment to other countries. The much-admired rapid recapitalisation of banks was largely a consequence of these macroeconomic policies. The expectations that the US authorities would not accept a prolonged recession and that the economy would rapidly get back to growth induced investors to participate in the recapitalisation of banks by the private sector, not by the public sector. These positive effects may have created substantial risks to financial stability risks. First, leverage did not disappear; it was to a large extent simply shifted from the private sector – from households and banks – to the official sector, i.e. the Treasury and the Fed. If we consolidate the private and the public sector including the Fed, then the adjustment was minor. The exit from the current expansionary monetary policy in the US could affect deleveraging. The level of household debt might be sustainable today, but it might become less sustainable, even unsustainable, once monetary policy is normalised, for example when interest rates increase to a more normal level. Another problem is that the US financial markets are becoming more and more frothy. The report is silent on the number of sectors that make up the ‘shadow banking’ system, which has increased in size as the banking system has limited its activities. The shadow banking system is less regulated and possibly poorly capitalised; it poses risks to the whole economy. Similarly, the report is silent on the housing sector, which might also be affected by the exit from expansionary policies. The danger now is complacency about the US. Even the Fed agrees that the financial system in the US is highly fragile. It is true that a major obstacle in dealing with the crisis in the Eurozon is inadequate governance. The adjustments achieved by weak countries are commendable, but much more remains to be done. At the same time, it would be fair to recognise a number of improvements that have been achieved or that
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Geneva Reports on the World Economy
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International Center for Monetary a
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International Center for Monetary a
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Acknowledgements We thank Susan Lun
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List of Conference Participants Edm
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List of Conference Participants xi
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List of Conference Participants xii
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Foreword Since 1999 the Geneva Repo
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2 Global debt analysis: Deleveragin
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Global debt analysis: Deleveraging
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Page 123 and 124: References 105 Jorda, O., M. Schula
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