This week we look at a report called “Working Out of Debt,” about debt and deleveraging, from the McKinsey Global Institute. This is a well-done summary of their longer paper, which has been updated, called “Debt and deleveraging: Uneven progress on the path to growth.” I discussed the original paper both in my regular letter and in Endgame. It is one of the best, most definitive pieces on the topic I have read. For those trying to understand how the deleveraging process will affect their particular world, I think it is a must-read. I have been spending more and more time thinking about the whole process of deleveraging, and am coming to think deleveraging is the critical and fundamental factor shaping the economic environment and impacting every decision countries and businesses are faced with. This paper was done by Karen Croxson, Susan Lund, and Charles Roxburgh; and they are to be especially commended for their insight and work.
This summary and the full report look at the relevant lessons from history about how governments can support economic recovery amid deleveraging, and at the signposts business leaders can look for to see where economies are in that process.
Overall, they tell us, the deleveraging process has only just begun: “During the past two and a half years, the ratio of debt to GDP, driven by rising government debt, has actually grown in the aggregate in the world’s ten largest developed economies. Private-sector debt has fallen, however, which is in line with historical experience: overextended households and corporations typically lead the deleveraging process; governments begin to reduce their debts later, once they have supported the economy into recovery.”
You can sign up at their website and see the full report at https://www.mckinseyquarterly.com/Working_out_of_debt_2914. I would strongly recommend you do so, not only for this report but because their website is chock full of well-done articles on a wide variety of topics, and they update it frequently with more material. It is all top-notch. It is worth visiting just to see what they have done in areas that may be of more specific interest to you, or because like me you are an information junkie and want to keep up on a wider world than just macro-economics.
Have a great week. Mine will be busy but interesting, which is always good. And this Friday I start a series on the choices that we face in the US, so there will be lots to ponder amidst the noise.
Your wondering how the Giants got into the Super Bowl analyst,
Before we get into today's Outside the Box I want to clear up a few ideas from this weekend's letter. There have been posts on various websites equating my piece on deflation with Paul Krugman. They say I am advocating kicking the can down the road and not reducing the deficit.
Wrong. What I have been trying to point out for several years is that we have no good choices. We are down to bad and very bad choices. The very bad choice (leading to disastrous - think Greece) is to continue to run massive deficits. The merely bad choice is to reduce the deficits gradually over time. As I try to point out, reducing the deficits has consequences in the short term. It WILL affect GDP in the short term. Krugman and the neo-Keynesians are right about that. To deny that is to ignore basic arithmetic.
I am not for kicking the can down the road. Not to begin to deal with the deficits, and soon, risks an even worse problem. But - and this is a big but - I don't want to stomp on the can, either.
Now, let's get into this week's Outside the Box. I offer you a very intriguing essay by those friendly guys from Bedlam Asset Management in London. They argue that Belgium's sovereign debt should be suspect, and is the country that could be a "sleeper" problem. This is a very interesting read, with a lot of history. It is not too long and very interesting. Enjoy. (www.bedlamplc.com)
Your thinking sovereign debt is the biggest bubble of all analyst,
This week I thought I would give you an Outside the Box with a more European flavor, as I am in Tuscany at the moment and on to Paris later this week and then back here for a working weekend with partners. Life is tough. :-)
Dylan Grice of Societe Generale (based in London) is fast becoming one of my favorite writers. This thought-provoking piece makes us meditate on whether central banks will print money in response to the fiscal crisis in the developed world countries. I am not certain that all central banks will print with abandon, BUT we need to think about what happens if they do.
I need to hit the send button now, as we are off to watch Italy in the World Cup in a little village (Montisi) where they have set up screens in the town square. My first connection with European football live with crazy fans and all! Should be fun!
Your under the Tuscan sun analyst,
Long time readers know that I am a huge fan of Martin Wolf, economist and columnist for the Financial Times. His writing is the reason to get the Pink Lady (as the Financial Times is known) as far as I am concerned.
This week's Outside the Box has two columns back to back from last week from Wolf, talking about the problems in Britain which look like the same problem all over the developed world. Wolf argues (rather cogently) that the answer is to increase exports and for a further weakening of the pound. Quoting:
"Weak sterling, far from being the problem, is a big part of the solution. But it will not be enough. Attention must also be paid to nurturing a more dynamic manufacturing sector. With the decline in energy production under way, this is now surely inescapable."
Can I envision the pound at parity with the dollar? Yes, I can. But look at what that implies. It makes it tougher on US exporters just when we need a strong export base. Can every country devalue its currency (or allow it to fall?) as a way to become prosperous? And against whom? Will Europe sit by? What will that do to the US earnings of multi-national corporations? Will Senator Schumer accuse Britain of currency manipulation and want a 25% tariff?
I have made the point many times that not every nation can export their way to prosperity. Someone has to buy! While Wolf has the right prescription for Britain, it is the same prescription that every nation wants to pursue. But we can't all do it at once. Read these columns in that light.
Have a great week.