Debt and savings in the euro area: An update (and how net exports have been keeping the EA afloat so far)

This is an updated chart of the flow of financial savings and debt in the euro area (EA).

EA balances

For each quarter, the red bars (when positive) measure the flow of financial savings to resident households (dark red) and financial corporations (light red).

The flow of financial savings has been consistently positive throughout the period, reflecting the quarterly addition to the stock of private savings. Notice the recent decline of financial savings of financial corporations.

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What would happen if the Fed decided to send a $1000 check to every adult American?

Here is my answer on Quora:

This would simply be equivalent to a tax cut. At the end of the day, every adult American would find $1,000 more in her pocket.

If the Fed does it directly, this would not be counted as government “debt”.

Some people call this “helicopter money”. It is a form of fiscal policy in disguise.

A tax cut would be a good idea today in the U.S.

Also, here is Joerg Bibow’s letter to the Financial Times on helicopter money.

A T-shirt model of savings, debt, and private spending

As long as the Euro area enforces balanced budget constraints at ALL levels of government, the Euro area will not be sustainable.

I have summarized here the argument behind the statement above.

What follows is a simple model that shows the logic of the argument.

1. In a monetary economy where the private sector demands financial assets as a vehicle to store wealth (aka ‘financial savings’), spending (by the private sector) can be assumed to depend on saving desires. Specifically, in any given period of reference, the change in total spending (ΔE) is a function (α) of the difference between the available stock of financial assets (FA) and the desired stock of financial savings (FAd):


The intuition is that if the value of available financial assets exceeds the desired stock, spending will increase, and vice versa.

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European fiscal rules violate the savings-debt constraint

In a forthcoming article (‘A T-shirt model of savings, debt, and private spending: lessons for the euro area’, European Journal of Economics and Economic Policies: Intervention, Vol. 13 No. 1, 2016, pp. 39–56), I have discussed the relevance of the savings-debt constraint in macroeconomics, and have argued that EU policies violate the savings–debt constraint. As long as this continues, the euro area will continue to live dangerously and will remain vulnerable to political disintegration.

The EU has always stressed that euro area’s national government budget must be consistent with the budget constraint set by fiscal rules, while offering no other channel for fiscal flexibility at the euro area level. This approach is inconsistent with a key constraint in macroeconomics that I call the savings-debt constraint.

In a nutshell, the savings-debt constraint says that any policy that inhibits debt also inhibits financial savings, spending, and jobs. Evidence that the EU policy framework is inconsistent with the savings-debt constraint is offered by the first priority in the list offered online by Jean-Claude Juncker, President of the European Commission: ‘Creating jobs and boosting growth – without creating new debt.’ As long as EU policymakers believe or assert this principle, the euro is in unsafe political hands.

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The (asymmetrical) negative side of negative rates

Commenting on the last Japanese move, Lisa Abramowicz (The Negative Side of Negative Rates) rightly argues that the only positive effect on spending that one can expect from negative rates is through a depreciation of the yen (at least, as long as it lasts). She writes that negative rates is an idea that “sounds good in theory”, but she clearly acknowledges that the effect on bank lending is likely to be dampening, not stimulative. That negative rates do not have an expansionary, and have probably a deflationary effect has been maintained by some economists, including this blog here and here and also the Q&A here. It should be clear by now to an increasingly number of people that what we call a negative interest rate (on banks’ excess reserves) is actually a positive tax rate!

I suspect that those who believe that negative rates stimulate lending have a view of central bank interest rates that does not fit the reality of a monetary system. They seem to think there is a symmetry between positive and negative rates. They seem to think that because lower interest rates mean lower cost of borrowing, an interest that gets so low to turn negative is an even more powerful borrowing (and spending) stimulus. Equivalently, at negative rates lenders will get encouraged to lend less (and spend) more.


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