Destabilizing an Unstable Economy Michalis Nikiforos

April 13, 2016 presentation prepared for the 25th Hyman P. Minsky Conference, Levy Economics Institute of Bard College, April 12–13, 2016

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Figure: Index of Real GDP in US Recoveries, 1949Q4–2015Q4

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Figure: Index of Employment-Population Ratio in US Recoveries, 1949Q4–2015Q4

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Figure: Index of Labor Productivity in US Recoveries, 1949Q4–2015Q4

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Figure: Index of Real Personal Consumption Expenditures in US Recoveries, 1949Q4–2015Q4

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Figure: Index of Real Gross Private Investment in US Recoveries, 1949Q4–2015Q4

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Figure: Index of Real Government Expenditure in US Recoveries, 1949Q4–2015Q4

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Figure: Index of Real Exports in US Recoveries, 1949Q4–2015Q4

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Figure: Index of Real Imports in US Recoveries, 1949Q4–2015Q4

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Figure: Trade Balance, 1985Q1–2015Q4 Michalis Nikiforos

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Destabilizing an Unstable Economy

Two important destabilizing factors: 1

the slowdown of the global economy (and appreciation of the dollar)

2

the overvalued asset markets

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Destabilizing an Unstable Economy

Two important destabilizing factors: 1

the slowdown of the global economy (and appreciation of the dollar)

2

the overvalued asset markets

The current configuration of the US economy is unstable. The reasons for this instability are structural: high income inequality high external deficits the fiscal conservatism

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The Unstable Economy If an economy faces weak net export demand and at the same time there is a restrictive fiscal policy, economic growth becomes dependent on rising private borrowing Growth is the result of a spectacular rise in private expenditure relative to income and thus an increase in the debt to income ratio of the private sector [a Minskyan process] Because of rising inequality this increase in the debt-to-income ratio falls unevenly on households at the bottom of the distribution. This process is facilitated by asset inflation; the “Main St” is at the mercy of the Wall St to an unusual extent. It is this configuration that is now threatened by a weakening in global growth and the situation in the financial markets

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Baseline Scenario

Builds on the CBO’s The Budget and Economic Outlook: 2016–2026 CBO projects growth of 2.7% in 2016, 2.5% in 2017 and 2% afterwards Primary deficit is projected to remain constant as a percentage of GDP The baseline scenario examines the conditions necessary for these projections to materialize.

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Assumptions

We make assumptions that are as “neutral” as possible: A mild increase in the price level A constant nominal exchange rate. The growth and inflation rates of US trading partners follow the IMF’s WEO projections. Equity and real estate market prices will increase mildly—by 2 percent annually—until 2020.

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Figure: Private Gross-Debt-to-GDP Ratio, Actual and Projected, 2000−20 Michalis Nikiforos

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Figure: Baseline Scenario: Main Sector Balances, Actual and Projected, 2005−20

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Figure: S&P 500 Index, 1970–2015

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Figure: Shiller Cyclically Adjusted Price–Earnings Ratio, 1881–2016

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Figure: Market-Capitalization-to-GDP Ratio, 1971Q1−2015Q4 (1971Q1=100) Michalis Nikiforos

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Figure: S&P/Case-Shiller Home Price Indices, 1975−2015

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Figure: Difference between the Oct 2014 and Oct 2015/Jan 2016 WEO Projections for the Growth Rates of the Main US Trading Partners Michalis Nikiforos

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Three scenarios

Scenario 1 Over the period 2016–20 the dollar will appreciate by an additional 20 percent, and the growth and inflation rates of US trading partners will be 1% lower than the IMF projections.

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Three scenarios

Scenario 1 Over the period 2016–20 the dollar will appreciate by an additional 20 percent, and the growth and inflation rates of US trading partners will be 1% lower than the IMF projections. Scenario 2 The stock market continues to fall throughout 2016 and then stabilizes for the rest for the projection period and the private sector moves at the end of 2016 toward a second round of deleveraging.

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Three scenarios

Scenario 1 Over the period 2016–20 the dollar will appreciate by an additional 20 percent, and the growth and inflation rates of US trading partners will be 1% lower than the IMF projections. Scenario 2 The stock market continues to fall throughout 2016 and then stabilizes for the rest for the projection period and the private sector moves at the end of 2016 toward a second round of deleveraging. Scenario 3 Scenarios 1 and 2 combined

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Figure: Real GDP growth rate, Actual and Projected, 2010-2020 Michalis Nikiforos

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Recap-Conclusion

The instability of the US economy is primarily structural, and is related to three main problems: high income inequality high external deficits the fiscal conservatism

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Recap-Conclusion

The instability of the US economy is primarily structural, and is related to three main problems: high income inequality high external deficits the fiscal conservatism This unstable structure is further threatened by 1

the slowdown of the global economy (and appreciation of the dollar)

2

the overvalued asset markets

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Recap-Conclusion

Achieving sustainable economic growth in the United States requires, first and foremost, addressing these fundamental issues: a decrease in income inequality, international cooperation to rebalance the global economy and improve the US external position, and relaxation of the government’s fiscal stance. The alternative is a future of secular stagnation or debt-driven recoveries that will result in increasingly severe financial and economic crises.

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