Private Sector Financial Balances 1980-2012:

Contrasting Experiences of Australasian and Northern European Countries.

Paper for Asia Pacific Economic and Business History Conference, Hamilton, New Zealand, 13-15 February 2014.

Keith Rankin, Unitec Institute of Technology, Auckland, New Zealand

Debt & Deficits – Credit Debt & Deficits – Credit && Surpluses Surpluses

Debt and Credit – cumulative stock variablesDebt and Credit – cumulative stock variables– relationship

• debtors and creditors "joined at the hip" (Atwood)debtors and creditors "joined at the hip" (Atwood)– debt: topic of discomfort

• allegedly greater discomfort in some culturesallegedly greater discomfort in some cultures• eg Germany versus English-speaking countrieseg Germany versus English-speaking countries

– debt: topic of confusion• country's debt; national debt; public debtcountry's debt; national debt; public debt

Deficits (D) and Surpluses (S) – flow variablesDeficits (D) and Surpluses (S) – flow variables– accounting identity: total surpluses = total deficits (S=D)

• S + (-D) = 0: sum of all sectoral balances equals zeroS + (-D) = 0: sum of all sectoral balances equals zero• a deficit is an addition to debt or a reduction of credita deficit is an addition to debt or a reduction of credit

SectorsSectors

Global EconomyGlobal Economy– governments (public) and others (private)

• private includes corporate and householdprivate includes corporate and household• two sectors: one degree of freedomtwo sectors: one degree of freedom

– private sector balance: negative of government surpluses• global government sector almost always in deficitglobal government sector almost always in deficit• see next slide for 2001 to 2010 global balancessee next slide for 2001 to 2010 global balances

– interpretation• economists commonly think of 'crowding out'economists commonly think of 'crowding out'

– implies autonomous government; accommodating private sector– untenable interpretation post 2008

• governments have 'intelligence' to accommodategovernments have 'intelligence' to accommodate– called counter-cyclical fiscal policy

Global Intersectoral BalancesGlobal Intersectoral Balances

SectorsSectors

National EconomyNational Economy– Foreign sector; Government sector; Private sector

• two degrees of freedomtwo degrees of freedom• foreign balance is negative of current account balanceforeign balance is negative of current account balance• example profiles: Japan, USA, UK and Germanyexample profiles: Japan, USA, UK and Germany• possible for some countries to have positive G possible for some countries to have positive G andand P P

– but not all !– such, if long term, would be an ideal 'mercantilist' position

Australasia: Australasia: New Zealand and AustraliaNew Zealand and Australia– commonly classed as debtor-deficit economies, like USANordic Countries:Nordic Countries: Sweden, Norway, Denmark, Finland, IcelandSweden, Norway, Denmark, Finland, Iceland

JapanJapan

United StatesUnited States

United KingdomUnited Kingdom

GermanyGermany

Profiles: Aust-NZ vs. Nordics Profiles: Aust-NZ vs. Nordics Similar profiles in 1980sSimilar profiles in 1980s– common themes

• pre-1980s financial 'repression'pre-1980s financial 'repression'• rapid finance-sector liberalisationrapid finance-sector liberalisation• Australia least rapid liberaliserAustralia least rapid liberaliser

– financial liberalisation• rapid emergence of negative private-sector balancesrapid emergence of negative private-sector balances• government appears to have crowded out private government appears to have crowded out private

sector in New Zealand in mid-1980ssector in New Zealand in mid-1980s• substantial financial flow to these private sectors after substantial financial flow to these private sectors after

1987 in countries with lesser sharemarket crashes; 1987 in countries with lesser sharemarket crashes; banking crises c.1990banking crises c.1990

Contrasting profiles after about 1992Contrasting profiles after about 1992

AustraliaAustralia

SwedenSweden

DenmarkDenmark

NorwayNorway

New ZealandNew Zealand

FinlandFinland

IcelandIceland

IcelandIceland

Extended Profiles since 1992Extended Profiles since 1992

Nordic CountriesNordic Countries– especially Sweden, Denmark, Finland

• mercantilist 'creditor-surplus' profilemercantilist 'creditor-surplus' profile• SwedenSweden

– banks rescued in government equity bail-outs– governments and private sector pursue austerity– strategies accommodated by foreign sector– like Malaysia (especially) after Asian 1997/98 crisis

AustralasiaAustralasia– especially New Zealand

• debtor-deficit private-sector profiledebtor-deficit private-sector profile• no sign yet of Scandinavian-style crises despite profileno sign yet of Scandinavian-style crises despite profile• accommodates foreign surpluses via monetary-policyaccommodates foreign surpluses via monetary-policy

MalaysiaMalaysia

Global Financial Crisis 2008-10Global Financial Crisis 2008-10"Balance-sheet recession" (Koo)"Balance-sheet recession" (Koo)– autonomous private sector surpluses in corporate and

household sectors, through debt-reduction andopen-mouth policy accentuating precautionary saving• fiscal policy, not zero interest rates, accommodatefiscal policy, not zero interest rates, accommodate

– accentuated post-'92 pattern in creditor-surplus countries– reversal in most debtor-deficit economies, incl. Aust.-NZPost GFC: echoes of 1920s?Post GFC: echoes of 1920s?– return to profiles of last 20 years creates short-run global

stabilisation but accentuates long-run financial imbalance– fewer sectors or sub-sectors willing/able to accommodate

increased global preference for private surplus balances