There is much international preoccupation with debt at the public sector, household and corporate levels and the upward creep in interest rates does apparently keep central bankers - including our own Mr. Poloz - awake at night. Given the problem is an international one, sometimes it is useful to try and get a global perspective on the numbers. One report from a relatively new outfit known as the Institute of International Finance (IIF) recently pegged the total amount of global debt at $237 trillion (USD) or well over 300 percent of the world's annual economic output. According to one of their slides, in 2017 financial sector debt was $59 trillion, household debt $45 trillion, government debt $64 trillion and non-financial corporate debt $70 trillion. This would make global public debt about 27 percent of the global debt total in 2017 and household debt about 19 percent with the remaining 54 percent from the corporate and financial sectors.
I was of course interested in what the trend has been over time particularly with government debt and the IIF site did not seem to have a lot of ready access to data so I went off on a bit of a hunt. I found estimates of global gross government debt going back to 2005 from The Economist. It is a very nice "debt clock" presentation that allows you to look at the world at a glance as well as examine individual countries. I then went to the IMF site and obtained estimates of global GDP data and put everything together in the figure below.
Global gross public debt has grown from $26.7 trillion (USD) in 2005 to reach $61.5 trillion in 2017. The average annual growth rate in gross public debt over this entire period was 7.3 percent but 2009-2011 averaged 12.6 percent while 2012 to 2017 averaged 5.3 percent. So it would appear the growth rate has slowed but until recently was still growing faster than global GDP. As a share of global GDP, gross public debt fell from 56.1 percent in 2005 to 49.5 percent by 2008 and then began to climb reaching 78 percent in 2016 and declining slightly to 77.1 percent in 2017.
So, as we move into an environment of gradually rising interest rates there will indeed be a squeeze on public sector budgets. According to the Economist site, Canada's public sector debt to GDP ratio is currently 85 percent so we are a bit above the world average. Indeed, we are labelled as having higher public debt levels along with much of Europe, the United States, China, India and Australia and Brazil.
However, we spend much of our time thinking about debt as if it were contained in water-tight compartments. We talk about public sector debt, household debt and corporate debt as if the public and private households were somehow separate bungalows living in gated communities and not interacting much with one another. In reality, think of the government, household and corporate sectors as adjoining town homes sharing a common foundation. If anyone of these attached town homes suffers weather damage to the shingles on its roof or gets water in its basement, there will inevitably be spillovers to the adjoining structures.
As interest rates rise, there are bound to be spillovers from one sector to another with the linchpin being households. As interest rates rise, it is individual households that ultimately pay the debt service costs to government via taxes, pay to service their mortgages and buy the goods and services from corporations that keep the economy humming and allow the corporations to service their debt. It is a lot more inter-connected than you think which is why central bankers should be on edge.
On the other hand household debt service payments as a % of disposable income are at a record low in the US. Thus a rise in interest rates, long as it was a gradual as the fall in interest rates over the last 25 years or so, probably would not be a big deal. See:
https://fred.stlouisfed.org/series/TDSP
Posted by: Ralph Musgrave | May 30, 2018 at 06:32 AM
And of course, interest rates are the lowest they have been in 5,000 years...http://www.businessinsider.com/interest-rates-5000-year-history-2017-9.
Posted by: Livio Di Matteo | May 30, 2018 at 08:07 AM
How economists missed out on the essential relationship of economics
Comment on Nick Rowe on ‘Public Debt: A Global Perspective’
Roughly speaking, science is about relations. Economics, too, abounds with relationships: supply function, demand function, consumption function, the Phillips Curve, IS-LM, the global debt clock,#1 and so on.
Some of these relationships implicate trouble for the future: “As interest rates rise, there are bound to be spillovers from one sector to another with the linchpin being households. As interest rates rise, it is individual households that ultimately pay the debt service costs to government via taxes, pay to service their mortgages and buy the goods and services from corporations that keep the economy humming and allow the corporations to service their debt. It is a lot more inter-connected than you think which is why central bankers should be on edge.” (Nick Rowe)
True, indeed, but a bit trivial. A higher interest rate means more money for the borrowers. This is known since five millennia.#2 To be sure, deficit spending and debt have an impact on the distribution of income and financial wealth.
However, economists talk much about the relationship between deficit spending and inflation or employment but not so much about deficit spending and distribution. The reason is simple: economists know next to nothing about it. The ultimate reason, though, is that economists do not know what profit is.#3 This, of course, includes Nick Rowe.
Fact is that economists are incompetent scientists and they thoroughly messed up macroeconomics.
To make the argument short, the axiomatically correct Profit Law for the economy as a whole is given as Qm=Yd+(I−Sm)+(G−T)+(X−M) which reduces to Qm=G−T for Yd, I, Sm, X, M = 0. The reduced Profit Law says that the monetary profit of the business sector Qm is equal to the deficit (G−T) of the public sector, in a nutshell: Public Deficit = Private Profit.
As public debt grows, so does the financial wealth of the one-percenters. The same holds for private debt. And this is what can be observed over the last decennia. Everybody has heard the two slogans: the rich get richer, and, worldwide debt grows exponentially. The exact relationship between the two phenomena is given with the Profit Law.
The Profit Law is the essential relationship for the monetary economy. The curious thing is that economists do not know it.#4 For 200+ years now, the Profit Theory is false and by consequence Distribution Theory. Nick Rowe’s discussion of the potential hazards of public debt shows that he is wandering around in the dark in blissful ignorance of the real threat.
Egmont Kakarot-Handtke
#1 Economist, The global debt clock
https://www.economist.com/content/global_debt_clock
#2 Business Insider, The 5,000-year history of interest rates shows just how historically low US rates still are right now
https://www.businessinsider.de/interest-rates-5000-year-history-2017-9?r=US&IR=T
#3 For details of the big picture see cross-references Profit
http://axecorg.blogspot.com/2015/03/profit-cross-references.html
#4 “A satisfactory theory of profits is still elusive.” (Desai, Palgrave Dictionary)
https://axecorg.blogspot.com/2018/04/profit-after-200-years-still-elusive.html
Posted by: Egmont Kakarot-Handtke | June 02, 2018 at 03:42 PM
@Egmont:
That was my post so if the post is "trivial", I am entirely to blame. Incidentally, I don't think my point about the intertwined nature of government debt, household and corporate debt is trivial at all. True, it was a short blog post but that is the point. It is a blog and not a university press tome. Not sure I follow your points about profit and distribution theory and how we are all wandering about in the dark but will check out a few of the links you mention. Livio.
Posted by: Livio Di Matteo | June 02, 2018 at 06:48 PM
Egmont,
"The reduced Profit Law says that the monetary profit of the business sector Qm is equal to the deficit (G−T) of the public sector, in a nutshell: Public Deficit = Private Profit."
"As public debt grows, so does the financial wealth of the one-percenters."
Debt and deficits are not synonymous. A deficit occurs when expenditures exceed income.
Debt is one of several means (others being equity, charity, theft) by which a deficit is financed.
Also, see:
Corporate Profits
https://fred.stlouisfed.org/series/A053RC1Q027SBEA
Federal Deficit
https://fred.stlouisfed.org/series/FYFSD
Your equation Qm = G-T Does not explain rising profit margins from about 1947 to 1969.
Posted by: Frank Restly | June 03, 2018 at 07:40 PM
Frank said:
"Debt and deficits are not synonymous. A deficit occurs when expenditures exceed income.
Debt is one of several means (others being equity, charity, theft) by which a deficit is financed.
Your equation Qm = G-T Does not explain rising profit margins from about 1947 to 1969."
Egmont said earlier:
"which reduces to Qm=G−T for Yd, I, Sm, X, M = 0. "
The point was made that with households' budgets balanced and current account balanced, then, business profits = govt deficit. Currently in Australia for example, household debt is fueling most of business profits.
The Bank of England released two documents in 2014 'introduction to money' and 'money creation in modern economy' where it basically described all money as debt and wherein it stated "If everyone in the economy were to pool all of their assets and debts together as one, all of the financial assets and liabilities — including money — would cancel out".
This basically says that unless either households or governments go into debt (assuming current account balanced), there will be no money, if no money means no business profits, no business profits means no jobs or stocks to invest in for retirement.
Posted by: Dean | June 03, 2018 at 08:40 PM
Dean,
Yes I understand that money and debt are two sides of the same coin - when a loan is made, this creates both an asset (money) and liability (debt) for the borrower.
Likewise an asset (debt) and liability (money) is created for the lender.
However, corporate profits (and indeed every other economic variable) are a function of both how much money / debt is created (M) and how quickly that money circulates through an economy (V). A baby boom and / or a productivity boom is sufficient to raise corporate profits (via increased money velocity) while holding G-T = 0, Yd, I, Sm, X, and M = 0 as well.
Finally, a corporation financed entirely from equity (no interest costs) will in general be more profitable than a corporation financed entirely with debt.
Posted by: Frank Restly | June 03, 2018 at 09:19 PM
Hi Frank,
Steve Keen did some work on this same concept but I was unable to grasp it.
I'm not saying you are wrong, but I am unable to see how any amount of 'profit' can exist in the aggregate unless consumers spend more than they receive (in the aggregate), now matter how fast or slow the circulation of income and spending occurs. I just can't see the mechanics of how else they come about.
I am also unable to see how productivity is tied to profitability in the aggregate (although from a microperspective it is different).
I come to terms with this by imagining that if we totalled all firms and they produced 1000 units at a wage cost per unit of $1, then in order to profit, consumption expenditures must be greater than $1000, which means it must be greater than total wages. If these same firms all then cut production down by half in the same time period, they produce 500 units at a wage cost per unit of $1, then consumption expenditures only need be greater than $500 (i.e. greater than wages) and it will still profit. I am unable to see how profits are tied to productivity in the aggregate.
I will confess however that this goes against the grain of what most people believe, at least that has been my experience in following economics over the last few years - I just have yet to see any clear demonstration of the mechanics of how profits come into existence other than by an increase in financial claims.
Cheers
Posted by: Dean | June 04, 2018 at 12:04 AM
Dean,
"I'm not saying you are wrong, but I am unable to see how any amount of 'profit' can exist in the aggregate unless consumers spend more than they receive (in the aggregate), now matter how fast or slow the circulation of income and spending occurs. I just can't see the mechanics of how else they come about."
"I come to terms with this by imagining that if we totalled all firms and they produced 1000 units at a wage cost per unit of $1, then in order to profit, consumption expenditures must be greater than $1000, which means it must be greater than total wages."
It's all in the timing of accounting and how long liabilities exist.
Okay, a firm produces 1000 units at a wage cost per unit of $1 in January.
Firm sells goods in February to consumers for $1500. Workers pay for goods with $1000 of wages and $500 of debt.
Firm takes $500 profit in March and pays out bonuses to workers. Workers take bonuses and extinguish debt.
A firm (over three months) has turned a profit of $500, and yet net liabilities after the same three months is $0.
Now imagine that same series of events occurring in three days instead of three months.
Increased money velocity (via higher productivity - 1000 units produced in a day instead of a month) results in higher profits over the same three month time frame.
I believe what Egmont is referring to is retained / accrued profits or some form of marginal propensity to consume among recipients of profit.
But his simple equation does not address this.
Posted by: Frank Restly | June 04, 2018 at 01:17 AM
Frank Restly, Dean
After Livio Di Matteo’s opening trivialities: (i) the credit markets are interrelated, (ii) there are spillovers, (iii) central bankers should be on edge, some people feel encouraged to come forward with more of this brain-dead stuff.
Frank Restly: “Debt and deficits are not synonymous.”
Dean: “Your equation Qm=G−T Does not explain rising profit margins from about 1947 to 1969.” The Profit Law says nothing about profit margins but about macroeconomic profit. This should be obvious for everybody who can read an equation. The reduced equation highlights the contribution of public deficits to total macroeconomic profit. The point at issue is the relationship between deficits and distribution.
Frank Restly: “… a productivity boom is sufficient to raise corporate profits”. Macroeconomic profit does NOT AT ALL depend on productivity. This is a microeconomic Fallacy of Composition. You simply do NOT understand what profit is and what the Profit Law says.#1
Dean: “I just have yet to see any clear demonstration of the mechanics of how profits come into existence other than by an increase in financial claims.” You will NOT find this demonstration on the Worthless Canadian Blather blog.#2, #3
Frank Restly: “I believe what Egmont is referring to is retained/accrued profits or some form of marginal propensity to consume among recipients of profit. But his simple equation does not address this.” True, the reduced equation does not address this because the express purpose of the reduced equation is to ISOLATE the effects of public deficits. What you obviously do NOT understand is that the complete equation Qm=Yd+(I−Sm)+(G−T)+(X−M) contains distributed profit Yd and by implication retained profit. These issues have been treated elsewhere.#4
Egmont Kakarot-Handtke
#1 For details of the big picture see cross-references Profit
http://axecorg.blogspot.com/2015/03/profit-cross-references.html
#2 The Emergence of Profit and Interest in the Monetary Circuit
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1973952
#3 Primary and Secondary Markets
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1917012
#4 The Profit Theory is False Since Adam Smith. What About the True Distribution Theory?
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2511741
Posted by: Egmont Kakarot-Handtke | June 04, 2018 at 03:12 AM
Egmont,
I found the link where you explain things a little better here. Thanks for the link.
http://axecorg.blogspot.com/2017/03/where-economics-went-wrong.html
This is a static equation in that there is no time lag indicated between a government / person going into debt and increases in macroeconomic profits being realized, which is quite unrealistic.
If you want to ignore time lag and assume that either:
1. The transmission mechanism from deficits to profit is instantaneous OR
2. Goods and people last forever
Then sure, productivity has no effect on profit.
Nonetheless, if you want to define "macroeconomic profit" this way, that's your prerogative.
Posted by: Frank Restly | June 04, 2018 at 05:46 AM
Well, I can see deficits fueling short term aggregate demand that generates some activity and profits for business but I do not see how deficits are equivalent to profits. The view of deficits as profit also does not explain to me why the business community is usually at the fore front of calls for deficit reduction and balanced budgets. It is certainly a different concept of profit than I was aware of til now. Thank you for the discussion.
Posted by: Livio Di Matteo | June 04, 2018 at 07:41 AM
Milton Friedman and Warren Mosler opposed all forms of government debt. I pretty much agree with them: I’ve examined about ten arguments for government debt in a new paper and strikes me at least nine of them are BS. See:
http://ralphanomics.blogspot.com/2018/06/the-merits-of-permanent-zero-interest.html
The journal I’m thinking of submitting the paper to asks authors to suggest people who might review their paper. Anyone like to review my paper? It’s about 5,000 words.
Posted by: Ralph Musgrave | June 04, 2018 at 12:37 PM
Frank Restly, Livio Di Matteo
Frank Restly: “This is a static equation in that there is no time lag indicated between a government/person going into debt and increases in macroeconomic profits being realized, which is quite unrealistic.”
The time dimension has been left out here in order to focus on the crucial distributional relationship which is given with Public Deficit (in period t) = Private Profit (in period t). Time has been extensively dealt with elsewhere.#1, #2
You maintain: “… if you want to define "macroeconomic profit" this way, that’s your prerogative.”
The foundational concepts of economics have to be consistently defined. This is done by axiomatization. There are no definitorial prerogatives in science, this delusion is called Humpty Dumpty Fallacy and it is endemic among brain-dead economists.#3
The Humpty Dumpty Fallacy is one of the main reasons why economics is, after 200+ years, still at the proto-scientific level.
Livio Di Matteo says: “I do not see how deficits are equivalent to profits.” It could be perhaps a good idea to study serious economics#4 and no longer hang out with the econ-clowns of WCI.
Livio Di Matteo says finally: “The view of deficits as profit also does not explain to me why the business community is usually at the fore front of calls for deficit reduction and balanced budgets.” This phenomenon has been addressed several times elsewhere.#5, #6
Egmont Kakarot-Handtke
#1 Essentials of Constructive Heterodoxy: The Market
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2547098
#2 The Synthesis of Economic Law, Evolution, and History
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2500696
#3 Profit, income, and the Humpty Dumpty Fallacy
https://axecorg.blogspot.com/2018/02/profit-income-and-humpty-dumpty-fallacy.html
#4 Profit theory in less than 5 minutes
https://axecorg.blogspot.com/2017/07/profit-theory-in-less-than-5-minutes.html
#5 Austerity and the idiocy of political economists
https://axecorg.blogspot.com/2017/03/austerity-and-idiocy-of-political.html
#6 Austerity: Who takes the little man for a ride?
https://axecorg.blogspot.com/2017/08/austerity-who-takes-little-man-for-ride.html
Posted by: Egmont Kakarot-Handtke | June 04, 2018 at 12:52 PM
Frank said: "Okay, a firm produces 1000 units at a wage cost per unit of $1 in January.
Firm sells goods in February to consumers for $1500. Workers pay for goods with $1000 of wages and $500 of debt.
Firm takes $500 profit in March and pays out bonuses to workers. Workers take bonuses and extinguish debt.
A firm (over three months) has turned a profit of $500, and yet net liabilities after the same three months is $0.
Now imagine that same series of events occurring in three days instead of three months.
Increased money velocity (via higher productivity - 1000 units produced in a day instead of a month) results in higher profits over the same three month time frame."
Ok, I see your point now. However;
(i) if we change the workers bonuses to 'retained earnings' or 'dividend payments' to stock owners who are other than workers, then the workers debt will still remain and the accumulated financial assets of the stock owners have increased by the same amount, or
(ii) if we change the original $500 debt the workers incurred to 'government transfer payments' or to 'stimulus spending by government', then that same $500 will end up in the stock owners hands.
..then Egmonts equation holds.
Posted by: Dean | June 04, 2018 at 07:07 PM
Livio said "The view of deficits as profit also does not explain to me why the business community is usually at the fore front of calls for deficit reduction and balanced budgets. "
Possibly because most people still believe in equilibrium and perfect markets maybe? From this perspective it makes sense for business leaders to complain - their argument is 'why should we work and others not work when perfect markets or equilibrium is the true nature of the economy?' or something to that effect. From this angle, it is the non-producers who are causing the demand for regulated markets.
And I know I've mentioned the Bank of England already, but in their two pieces their experience was that most people, even business people, are unaware of how the monetary economy actually works - although having said this, many businesses from my neck of the woods encourage debt financing for households; to them it seems it is much better that households incur the debt rather than govts run deficits
Incidentally, in Australia, where we made superannuation mandatory 30 years ago, our total retirement savings is less than 5% more than our total household debt - meaning, in 30 years Australia has saved nothing even though we boast of our economy and having no recessions in 23 quarters, and coming out of the GFC relatively unscathed etc.
Posted by: Dean | June 04, 2018 at 07:20 PM
Howq about a post coving the US / Canadian trade war?
Posted by: genauer | June 23, 2018 at 09:17 AM