Monthly Archives: October 2010

By Eswar Prasad and Mengjie Ding

The global financial crisis triggered a sharp increase in public debt levels, both in absolute terms and relative to GDP. The level of aggregate net government debt in the world rose from $23,000bn in 2007 to an expected $34,000bn in 2010. IMF forecasts indicate the level will reach $48,000bn in 2015. The ratio of world debt to world GDP rose from 44 per cent in 2007 to 59 per cent in 2010, and is expected to climb to 65 per cent in 2015.

Rising debt levels pose risks to fiscal and macroeconomic stability and also imply transfers of wealth across generations. Our analysis shows that advanced economies (AEs) account for much of the increase in world public debt, putting their own as well as global financial stability in jeopardy.

View the FT’s interactive graphic

 

By Francis Bator

Sir Andrew Large, former deputy governor of the Bank of England, advises the US to soon follow the UK example of fiscal surgery (in a letter to the FT on October 22). He appears to believe that the US too is “living beyond its means,” so “reductions in gross national product from… public spending cuts are inevitable”.

Not so, for the time being at least. True we continue to spend more on goods and services than we produce, importing more than we export to cover the difference ($539 bn/year in the second quarter = 3.75 per cent of gross domestic product). But we currently spend much less — and therefore produce much less — than our capacity to produce. 

Martin Wolf in his recent column fully embraces the message of Chapter 3 of the recent WEO (IMF World Economic Outlook). He suggests that this chapter “demolished” previous research on the possibility of expansionary fiscal adjustments, the most recent instalment of such research being a paper by Silva Ardagna and myself. 

The recent report of the committee chaired by Lord Browne, former BP chief executive, on UK higher education funding and student finance raises concerns about policy being driven by accountancy rules, rather than by rational argument. 

From Gavyn Davies’ blog:

Ben Bernanke’s speech in Boston on Friday seems to have disappointed those who were expecting him to announce concrete measures to restart quantitative easing, but we already knew from the last set of FOMC minutes that the groundwork for such an announcement had not been undertaken. That announcement will come after the committee’s next meeting on November 2nd and 3rd. Nevertheless, Mr Bernanke has nailed his colours to the mast, even more clearly than he has done in recent speeches. This is a Fed Chairman who is very dissatisfied with the depressed state of the US economy, and who is not afraid to say so. 

In his article “The economist’s reply to the ‘Inside Job”” Prof Frederic Mishkin misrepresents both his own activities, including his interview for my film, and the widespread conflicts of interest which have distorted academic economics and its role in the financial crisis. 

The US Fed’s policy-setting committee (FOMC) undertook large asset purchases last year, buying $1.7 trillion of mortgage-related and Treasury bonds. Last month, the Fed reaffirmed the easing bias and indicated that it could start buying vast quantities of government debt if unemployment did not improve. 

As the world struggles to recover from the financial crisis, the Nobel prize for economics has been awarded to three researchers whose work explains how market frictions can hinder the smooth functioning of the economy and its ability to adjust to shocks.

By Prof Frederic Mishkin

“You ought to be in pictures” is something no one has ever said to me. And as one of a number of economists making uncomfortable cameo appearances in the new Hollywood documentary, “Inside Job,” I now know why.

In July 2009, I agreed to be interviewed on camera for a film that was presented to me as a thoughtful examination of the factors leading up to the 2008 global economic collapse. About five minutes after the microphone was clipped to my lapel, however, it became clear that my role in the film was predetermined – and I would not be wearing a white hat. 

By Eswar Prasad and Karim Foda

The October 2010 TIGER update paints a sobering picture of a global economy that has lost momentum and is teetering between a slowdown and at best a tepid recovery. Advanced economies are stuck in a funk and even the dynamic emerging markets have lost some of their swagger.

The Global Financial Index took a beating in 2010 Q2 roughly around the initial period of the European debt crisis and has continued to weaken. Stock markets around the world remain in a state of torpor after a correction that signals a reversal of the optimism that led to their getting ahead—perhaps too far ahead—of improvements in real economic activity.

Credit growth, the latest addition to the TIGER financial (and overall) index, fell sharply towards the end of 2009, but has since begun to rebound, especially in emerging markets. Emerging market bond spreads and the TED spread have remained flat this year indicating that, despite the correction, financial markets are not under huge stress.