Die Billionen Schuldenbombe

1. Die BillionenSchuldenbombe Dr. Daniel Stelter

2. Debtlevelsclearly not sustainable Long-term asset values around 4 times GDP Debt (% of GDP) 500 450 419 400% historical average wealth to GDP 391 400 348 119 76 350 309 283 300 102 273 260 259 81 251 88 241 250 101 89 210 51 67 71 69 191 200 60 132 77 133 82 150 78 89 77 63 63 233 100 123 114 109 109 109 106 105 50 100 87 88 0 1 Private households Non-financial institutions Government 1. Total for Euro zone countries Note: Debt data as of 2011; non-consolidated total liabilities of governments, households, and non-financial corporations (loans only) at market prices Source: Eurostat; Federal Reserve; Thomson Reuters Datastream; bto analysis

3. Not to talk abouthiddenliabilities … Public gross debt/GDP prediction Germany France 600 600 400 400 200 200 0 0 1980 2000 2020 2040 1980 1980 1980 2000 2000 2000 2020 2020 2020 2040 2040 2040 US Japan UK No change in fiscal policy and age-related spending Small gradual adjustment (fiscal balance improves by 1 percentage point of GDP over the next 5 years) 1980 2000 2020 2040 Small gradual adjustment with age-related spending held constant at level of 2011 (in % of GDP) Source: Source: "The future of public debt: prospects and implications", BIS Working Paper, March 2010

4. Howto deal withtoomuchdebt? Austerity

5. Austerity atwork Greece in numbers 2 Even a 30% debt relief does not really help in billion € 3 Two bailouts have already been necessary -11 400 1 356 4 Shrinking GDP makes debt re-payment even more difficult 345 Public revenues shrink faster than expenditures Debt relief 107 • Debt • relief • 107 300 5 -47 A significant part of the economy is not counted in official statistics and does not bring tax revenues 240 233 Second 130 Second 130 200 186 6 -20 The population tries to rescue their savings 108 100 88 • First • 110 • First • 110 65 42 0 NominalGDP(2008) NominalGDP(2011) Publicdebt(2011)1 Publicdebt(2012)2 Bailouts(so far) Publicexpenditures(2011) Publicrevenue(2011) Blackmarket(2009) Deposit flight(Aug 2011—Jul 202) 1. Forecasted nominal value (market value is used in all other analyses) 2. Before repurchase of government bonds in January 2013 Source: National Statistical Service of Greece; Eurostat; Greek Ministry of Finance (Public Debt Bulletin June 2012); Eurostat; Transparency International; Wall Street Journal; Bloomberg; bto analysis

6. Howto deal withtoomuchdebt? Austerity Growing out oftheproblem

7. The growthformulaisbroken Economic growth = workforce × productivity Population evolution … … GDP growth per capita Percent p.a. World population in million 3.0 10,000 BC–2100 AD – 2100 AD Actual US +0.9% 2.5 10,000 Highestgrowthfrom 1950–2000 of~1.75% p.a. 2.0 1.5 5,000 1.0 +0.5% ActualUK 0.5 +0.1% CAGR 0 0.0 1300 1400 1500 1600 1700 1800 1900 2000 2100 10000 1 400 600 800 1000 1200 1400 1600 1800 2000 Note: Historical estimates of World Population estimates reflect "lower estimates" of US Census Bureau. Data by 2009 from US Census Bureau, starting 2010 from UN World Population Prospects Source: US. Census Bureau, Historical Estimates of World Population, 2012; United Nations, Department of Economic and Social Affairs, Population Division (2011). World Population Prospects: The 2010 Revision; Robert Gordon, "Is U.S. economic growth over? Faltering innovation confronts the six headwinds", NBER Working Paper 18315, http://www.nber.org/papers/w18315

8. Headwinds forfurtherproductivitygain Source: Robert Gordon, "Is U.S. economic growth over? Faltering innovation confronts the six headwinds", NBER Working Paper 18315, http://www.nber.org/papers/w18315 Innovation with less impact on productivity than in the past Percent per year 3.0 The West is falling behind on education 2.5 Hypothetical path • Intensified international competition increases labor cost pressure 2.0 1.5 • Efforts to reduce CO2/the end of cheap resources Actual US 1.0 • Underinvestment in assets by public and private sector Actual UK 0.5 0.0 • Increased income inequality 1300 1400 1500 1600 1700 1800 1900 2000 2100 Source: Robert Gordon, "Is U.S. economic growth over? Faltering innovation confronts the six headwinds", NBER Working Paper 18315, http://www.nber.org/papers/w18315

9. Debt above 90% of GDP leads to lower growth rates Source: Robert Gordon, "Is U.S. economic growth over? Faltering innovation confronts the six headwinds", NBER Working Paper 18315, http://www.nber.org/papers/w18315 GOV NFC HH 0–70% debt/GDP 71–100% debt/GDP >100% debt/GDP Total 1. GOV = public debt (gross liabilities) 2. NFC = Non financial corporations (total liabilities less shares and other equity) 3. HH = household debt (gross liabilities) Note: All data as of 2011S Source: BIS; Eurostat; national central banks; Thomson Reuters Datastream; bto analysis

10. Howto deal withtoomuchdebt? Austerity Growing out oftheproblem Back toMesopotamia

11. Back toMesopotamia? Includinghaircut Debt (% of GDP) Source: Robert Gordon, "Is U.S. economic growth over? Faltering innovation confronts the six headwinds", NBER Working Paper 18315, http://www.nber.org/papers/w18315 500 380 287 1,367 1,568 1,122 127 766 7,388 10,810 9,936 1,861 450 419 391 400 348 119 76 350 309 283 300 102 273 260 259 81 251 88 241 250 101 89 210 51 67 71 69 191 200 180% 60 132 threshold 77 133 150 82 78 89 77 63 233 63 100 123 114 109 109 109 106 105 50 100 88 87 0 1 Debt overhang (B€) Private households Non - financial institutions Government 1. Total for Euro zone Note: Debt data as of 2011 Non-consolidated total liabilities of governments, households, and non-financial corporations (loans only) at market prices Source: Eurostat; Federal Reserve; Thomson Reuters Datastream; bto analysis

12. Significanthitforsavers Includinghaircut NecessarydebtreductionandremainingHHfinancialassets (%) Source: Robert Gordon, "Is U.S. economic growth over? Faltering innovation confronts the six headwinds", NBER Working Paper 18315, http://www.nber.org/papers/w18315 125 380 287 1,367 1,568 1,122 127 766 7,388 10,810 9,936 1,861 100 • 16 • 28 • 31 39 39 • 47 75 • 52 Japan's and Ireland's household financial assets less than necessary for debt reduction • 74 • 81 • 100 • 100 50 • 84 • 72 • 69 61 61 • 53 25 • 48 • 26 • 19 0 • -22 -23 -25 1 Debt overhang (B€) Household financial assets needed for debt reduction Remaining household financial assets 1. Total for Euro zone Note: Debt data as of 2011 Non-consolidated total liabilities of governments, households, and non-financial corporations (loans only) at market prices Source: Eurostat; Federal Reserve; Thomson Reuters Datastream; bto analysis

13. Cyprus = Mesopotamia Source: Robert Gordon, "Is U.S. economic growth over? Faltering innovation confronts the six headwinds", NBER Working Paper 18315, http://www.nber.org/papers/w18315 Source: Financial Times, 26 March 2013, Economist "The Cypriot deal: Second time unlucky", 30 March 2013

14. Howto deal withtoomuchdebt? Austerity Growing out oftheproblem Back toMesopotamia Inflation

15. 100 80 60 40 20 0 Financial repression? Number of years to reach 180% threshold Source: Robert Gordon, "Is U.S. economic growth over? Faltering innovation confronts the six headwinds", NBER Working Paper 18315, http://www.nber.org/papers/w18315 Interest rate – GDP growth = -1 Interest rate – GDP growth = -5 Actual 2011 Interest rate – GDP growth -0.6 0.3 -0.6 -0.6 -0.9 2.1 1.4 1.0 5.9 Note: 2011 data, Portugal interest paid as of 2010 Non-consolidated total liabilities of governments, households, and non-financial corporations (loans only) at market prices Source: OECD; bto analysis

16. The ideaofhelicoptermoneyisgainingpopularity Source: Robert Gordon, "Is U.S. economic growth over? Faltering innovation confronts the six headwinds", NBER Working Paper 18315, http://www.nber.org/papers/w18315 Let us suppose that one day a helicopter flies over this community and drops an additional $1000 in bills from the sky, which is, of course hastily collected by members of the community … Today I will argue for a different approach and suggest that the Bank of Japan cooperate temporarily with the government to create an environment of combined monetary and fiscal ease to end deflation and help restart economic growth in Japan. … in some extreme circumstances— those in which there is a simultaneous and significant fall in both the price level and real output—it is unambiguously clear that OMF would be the best policy, and in some circumstances may be the only policy available to prevent continual deflation. Milton Friedman The Optimum Quantity of Money, Chapter 1 1969 Ben Bernanke Speech before the Japan Society of Monetary Economics Tokyo, May 31, 2003 Adair Turner Financial Services Authority Chairman, Lectureatthe Cass Business School, London, February 6, 2013 Source: The Economist; Financial Times; Irish Times; bto analysis

17. Just retirethe QE debt? Source: Robert Gordon, "Is U.S. economic growth over? Faltering innovation confronts the six headwinds", NBER Working Paper 18315, http://www.nber.org/papers/w18315 • After buying £325B of debt from the market, the public sector (the Treasury) is paying interest to itself (the BoE) on debt that it owes to itself. • Instead of selling the debt back into the market, the BoE can retire the debt. At a stroke, £325bn of UK government debt disappears. If the US follows suit, about $1.5T of US government debt will be retired. • The main obstacle to retiring the debt lies with themarkets and credit rating agencies. They may see this as a slide towards Weimar Republic economics: monetary financing of government debt by printing money. Consequently, both the BoE and the Treasury cannot be seen to advocate retiring QE-acquired debt at this stage. Source: Financial Times, 11 March 2012, page 9

18. Howto deal withtoomuchdebt? Austerity Growing out oftheproblem Back toMesopotamia Inflation

19. Die Billionen-SchuldenbombeWie die Krise begann und warum sie noch lange nicht zu Ende ist