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August 6 - August 18, 2017
Below the 3 percent threshold, however, a persistent current account deficit may not even be a bad thing depending on where the money is going.
The risks posed by a current account deficit depend on what kind of spending the country is engaging in.
One quick way to check where the money is headed is to see if the deficit is rising alongside an increase in investment as a share of GDP.
The strong baht encouraged forms of spending that add greatly to the risk of a widening current account deficit.
in which investors start pulling money out of one troubled country, triggering a pullout from countries in the same region or income class even though those nations can pay their bills.
Bank loans are the real hot money.
The concern in the post-crisis era is an emerging “savings glut,” created by the lack of investment opportunities.
Global Financial Integrity,
Economists call this dreaded belt-tightening process “internal devaluation,” and it achieves much the same end as a currency devaluation, by restoring export competitiveness.
devaluing its own currency by, say, 30 percent is going to raise its payments on those foreign loans by an equal margin.
In a country that lacks strong manufacturing industries, the cheaper currency can do little to promote exports, earn foreign currency, and help balance the current account deficit.
the recent global integration of supply chains,
exports now contain a larger share of imports, and if manufacturing powers try to gain an export advantage by devaluing their currency, they end up raising the price they have to pay for these imports.
driving up inflation,
the pivotal devaluation in China in 1993,
China had little foreign debt, it did not rely too heavily on imported goods, and most important, it had a strong manufacturing sector, which grew even faster after Beijing devalued the renminbi.
A somewhat similar evolution toward advanced manufacturing is under way in China, which is working its way up the ladder to make exports that rely less on a cheap currency to hold global market share.
But in big economies trade matters less than the domestic market.
many financial crises in the emerging world had been preceded by five consecutive years of debt growing at more than 20 percent a year,
Set in an unnamed Southeast Asian country, it describes how virtually everyone gets blinded by increasingly good times and low borrowing costs.
The precursor of all these crises—and thus the most powerful indicator of a coming crisis—was that domestic private credit had been growing faster than the economy for a significant length of time.
the clearest signal of coming financial trouble comes from the pace of increase in that debt.
Size matters, and pace matters more.
1992
private credit grew significantly faster than the economy for five years running and increased private credit as a share of GDP by a total of at least 40 percentage points.
a consistent turn for the worse came following the fifth year of the cycle, after the increase in private credit hit the 40-percentage-point threshold.
the economy suffered a sharp slowdown at some point after the increase in private credit crossed the 40 percentage point
threshold.
the GDP growth rate fell by more than half over the next five years.
If private credit grows significantly slower than GDP for five years running, it can create the conditions for an economy to recover strongly.
The critical question to ask about debt: Is private debt growing faster or slower than the economy for a sustained period?
the private sector is where debt manias typically originate.
even well-run banks cannot possibly dole out so many loans so quickly without making big mistakes.
shifting the debt of bankrupt private borrowers onto the government’s books.
The government’s debt also increases as it often attempts to soften the impact of the economic downturn by borrowing to increase public spending.
This pattern—of debt crises starting in the private sector, and the state playing a supporting role—is now well established.
As the pace of private credit growth picked up, the scale and likelihood of an economic slowdown increased as well.
In recent decades, recessions have been more likely to originate in debt-fueled property booms, for the simple reason that there has been an explosion in mortgage finance.
Worldwide, home loans now account for more than half of the business of the typical bank.
By 2013, a third of the new loans in China were going to pay off old loans, a merry-go-round that would stop as soon as housing prices started to fall.
There are four basic signs of a stock market bubble: prices rising at a pace that can’t be justified by the underlying rate of economic growth; high levels of borrowing for stock purchases; overtrading by retail investors; and exorbitant valuations.
By some estimates 10 percent of the firms on the mainland stock exchange are “zombie companies,” kept alive by government support.
Steady credit booms can leave banks with more capital, because they earn a good return on their loans, and with improved lending practices, they offer legitimately creative credit products.
Dealing with bad loans always poses a political problem in deciding who will suffer the pain.
the beginning of the end of a credit crisis often arrives not when the debts start to be repaid but when they begin to be resolved through forgiveness and relief, or foreclosure and default.
general, when total loans fall back under roughly 80 percent as a share of total deposits in the banking system, banks will be poised to start lending again.
In fact, in one large IMF study, 20 to 25 percent of the nearly four hundred postwar economic recoveries unfolded without a meaningful revival in credit growth.
It turned out, however, that without credit, a recovery will generally be very weak, with GDP growth rates around one-third lower than in a normal credit-fueled recovery.
on average a debt crisis was followed by a period of weak credit and economic growth that lasted about four to five years, after which both credit and GDP growth picked up.
Investors focus on the future, while the news media focus on the present.
