Looks like the deficits got high enough in the US and Euro zone to reverse things, and I’d guess UK and Japan as well even though the charts don’t yet show the reversal because past deficits of this magnitude would have been more than sufficient and there recent data is showing signs of a turn.

This is all usually indicative of a multi year upturn, who magnitude depends on the extent private credit expansion kicks in.
In the past the ‘borrow to spend’ private credit expansions have been helped by a variety of ‘peculiar’ events, including the credit expansion due to sub prime and other housing frauds most recently, the dot com era’s borrowing to fund impossible business plans, the credit expansion driven by the S and L frauds in the 80’s, emerging market credit expansion before that, etc. etc.

This time might be different/less robust if credit expansion channels are kept honest and fiscal policy tightened.

13 Responses

  1. But Koo argues persuasively that there is no private demand for credit due to the impairment done to private balance sheets (corporate in Japan, personal in the U.S.)from the bubble(s). Thus, would you temper any expectation for a ‘multi-year upturn’? Or are the addition of financial assets (via public deficits) enough to overcome?

    1. Ramanan, agreed. It packs a lot of info into a small package. Plus it is an excellent use of the video medium. It’s an interesting production model that is simple but flashy. My chief suggestion for improvement would be to slow the pace a bit.

  2. Excellent graphs to illustrate the almost mirror relationship between deficits and private sector savings. 🙂

  3. it can be a very modest multi year upturn, as indicated. will take that private sector credit expansion to make it robust. or a payroll tax holiday, revenue sharing, and an $8/hr transition job for anyone willing and able to work

  4. The chief question in my mind is whether we are have seen the end of the long financial cycle and are entering a new cycle, or….. I don’t think that this can be analyzed as a periodic business cycle independently of the LT financial cycle. At best, we are in a period of balance sheet rebuilding before credit and effective demand take off, and that will inhibit investment, even though many firms are flush. At worst, we haven’t hit the bottom of the GFC yet, and there are more shoes to drop.

  5. The US Chart displays a label: “Domestic Private Balance” where as all the other charts are labeled “Private Balance.” Does this chart remove foreign private balance?

  6. Off topic again

    The US Treas’ FX report.

    U.S. International Reserve Position
    http://www.ustreas.gov/press/releases/201077151330848.htm

    Report to Congress on International Economic and Exchange Rate Policies
    http://www.treasury.gov/offices/international-affairs/economic-exchange-rates/pdf/Foreign%20Exchange%20Report%20July%202010.pdf

    Annex: Foreign Exchange Reserve Accumulation – Recent Developments and Adequacy Measures
    http://www.treasury.gov/offices/international-affairs/economic-exchange-rates/pdf/Foreign%20Exchange%20Report_ANNEX.pdf

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