Thursday, 7 April 2011

A picture is worth a thousand words

I find this picture very revealing. It was taken from João Cerejeira's blog. It seems that the private sector has fully readjusted to the new reality. That readjustment was fully achieved in 2009, two years ago. Unfortunately, we do not observe such an adjustment the net borrowing needs of the Public Administration. On the contrary, we only observe a disadjustment.

The electoral campaign is going to start now, so I prefer to make any further considerations on who is to be blamed for.


  1. There is something wrong with the legend, isn't it?

  2. Are you inferring any causality from this picture?

  3. Crowding-out? has public sector expands, no credit for private sector - so, forced adjustment in net position due to credit rationing, as the public sector dries the market?

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  5. The point is the causality as suggested by Francesco. In my view the increase in public dissavings follows almost automatically from the increase in private savings, or put another way, the private sector was only able to increase savings (reduce dissavings) because the public sector increased dissavings.

    One reason this happens is because a significant part of the net borrowing requirements can be thought of as exogenous. For example, the income balance deficit (of 4.6% of GDP in 2010, and growing) can only be cut if there are defaults on debt (e.g., private sector bankruptcies). Alternatively it can be slowly reduced if the country becomes a net lender vis a vis the rest of the world (never going to happen in our life times). Finally its weight can be reduced if the country achieves high GDP growth rates. Otherwise, this large part of the net borrowing requirements likely grows and could be thought of as exogenous. The other two small components (capital and transfers) could also be thought as at least in part exogenous.

    The other main component of the net borrowing requirements is associated with the trade deficit. Thus, the only means by which the country can truly influence private plus public net borrowing requirements is through changes in the trade deficit (or through GDP growth).