The unsustainability feedback loop

From the outside looking in, someone trying to figure out exactly why Standard and Poor’s downgraded Greece and Spain — the former to below investment grade — has only the press releases to go on.  And from each, it seems clear that the downgrades are driven by the forecasts for GDP, nominal and real. 

GreeceUnder our revised assumptions (see below), we expect real GDP to be nearly flat over 2009-2016, while the level of nominal GDP may not regain the  2008 level until 2017.

SpainStandard & Poor’s credit analyst Marko Mrsnik said .. “We now project that real GDP growth will average 0.7% annually in 2010-2016, versus our previous expectations of above 1% annually over this period.”  We have also revised our views on the GDP deflator, so that we now expect nominal GDP to regain the 2008 level by 2015; previously, we had assumed that nominal GDP would exceed the 2008 level in 2013.

The projections for real GDP are grim enough but the possibility that nominal GDP — the thing that has nearly always gone up in developed economies since World War II — might not be at its 2008 level until 2015 (7 years) or 2017 (9 years!) is a shocker.  Whatever about the current level of wages and prices, this would mean revisiting the ingrained assumptions of annual increases in wages and prices for the next 5-10 years.  Not to mention revisting the question of what is a “reasonable” interest rate.  And most of all, the need for careful use of debt to GDP ratios.  If GDP isn’t increasing, then any growth in the level of debt makes the debt burden worse.

Anyway, two other quick thoughts.  First, S&P presumably excludes the effects of its own rating actions from its forecast.  But of course the ratings action itself now appears to be a driver of policy response to Greece’s predicament, if not the actual outcome.  And second, since S&P’s model is having such wide implications, and appears to be more pessimistic than either the baseline accepted by the European Commission and the IMF, shouldn’t the model be made available for scrutiny?  In particular, the ECB would surely want a look at the inflation projections, since nominal GDP is a variable over which they have some control.

3 thoughts on “The unsustainability feedback loop

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  2. The times of growth already ended. Technology, Productivity, Quality and Demographics make it that way.

    The best country will be the one that adapts better to the growth in productivity to the people lives: which means cheaper things due to productivity and less work time.

    This crisis started when the above trends forced desperate politicians to heat the economy to sustain an increasing bigger state and trying to maintain employment levels for a 5 day work week. Their solution was low rates which brought a big bubble.

    Unfortunately the Social State can’t adapt and don’t let us enjoy the great achievement of being able to spent less to produce. For growth statistics and work/hours 1000 Computers w/6 cores that cost 100 each is worse for growth and employment than 1000 useless computers that cost 100000 each. If those 1000 useless are so crap that have to be replaced in 2 years even better for statistics and employment.

    Instead the Social Inflacionist State probably will bankrupt itself and will claim many lives in its self destruction because it has no intelligence to be elastic.

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