Their existence and the danger that they will get stronger forces Merkel to appear even tougher when it comes to monetary stimulus.

BTW, I don’t know if you agree, but even if Germany exits the Euro, which sure would be good for everybody else, Germany itself is in great danger of becoming just like Japan. When it comes to demographics, export orientation etc. Germany is like a mirror image of Japan. Just like them we will hit the zero bound and stagnate without the right monetary policy. One key to the success Germany enjoys right now, is Draghis ECB, which is doing a monetary policy Germany wouldn’t allow if it were an island. So the Euro is actually good for Germany and if Draghi would do NGDP targeting, it would get even better.

]]>I’m just being flexible.

The point is it doesn’t matter how you define the domestic private financial sector surplus, there’s either no significant correlation between domestic private financial sector surplus and real GDP per capita growth, or the correlation is the opposite of what Matt McOsker (and by extension you) claim is the case.

We looked at:

1) Domestic private sector financial surplus as residual counting the central government primary surplus as the government sector financial balance (UK, 1831-2007, no significant correlation).

2) Domestic private sector financial surplus as residual counting the central government “actual” surplus as the government sector financial balance (UK, 1831-2007, no significant correlation).

3) Domestic private sector financial surplus as residual counting the general government “actual” surplus as the government sector financial balance (UK, 1900-2008, no significant correlation).

4) Domestic private sector financial surplus measured directly (US, 1953-2012, significant negative correlation).

Domestic private sector financial deficits are not correlated with depressions.

]]>The only reason I used that is because that’s what the BOE analysts used.

]]>That’s because you’re using the “public net lending/net borrowing” instead of “central government surplus”. UK public sector net lending/net borrowing data only goes back to 1900.

If you define the domestic private sector surplus as being equal to the “public net lending/net borrowing” minus the current account surplus, what you’ll find is that the longest periods of time that the domestic private sector was in deficit was from 1931 through 1934 (4 years), 1947 through 1951 (5 years), 1987 through 1990 (4 years) and 1998 through 2002 (5 years). (Note that the UK recovery from the Great Depression started in 1931.)

The growth in real GDP per capita averaged 0.85%, 1.12%, 2.76% and 2.49% in 1931-34, 1947-51, 1987-90 and 1998-2002 respectively. The weighted average RGDP per capita growth rates for the 18 years is 1.81%. For comparison the average rate of growth in real GDP per capita from 1899 to 2008, is 1.57%.

Defined this way, regressing the annual rate of increase in real GDP per capita on the domestic private surplus as a percent of GDP, the R-squared value is 0.0003 meaning only 0.03% of the variation in real GDP per capita growth can be explained by the domestic private financial surplus. So it’s even more statistically insignificant than was the previous measure. And, for what it is worth, the slope is negative (i.e. higher private sector surplus = lower RGDP per capita growth).

Instead of looking at domestic private financial surplus as a residual of the government and rest of world sectors, why not look at the domestic private financial surplus directly?

FRED has all the data necessary to calculate the domestic private financial surplus for the US back to 1947. Here it is as a percent of GDP in blue with the annual rates of change in RGDP per capita in red back to 1953 (population data starts in 1952):

http://research.stlouisfed.org/fred2/graph/?graph_id=139324&category_id=0

The US domestic private sector was in deficit from 1998-2001 and 2005-07. The average rate of change in RGDP per capita was 2.44% and 1.63% during 1998-2001 and 2005-07 respectively. The weighted average RGDP per capita growth rates for those 7 years is 2.09%. For comparison the average rate of growth in real GDP per capita from 1952 to 2012, is 1.96%.

Regressing the US annual rate of increase in real GDP per capita on the domestic private surplus as a percent of GDP, the R-squared value is 0.0922 meaning 9.22% of the variation in real GDP per capita growth can be explained by the domestic private financial surplus. Moreover, this result is statistically significant at the 5% level. Most importantly, the correlation is *negative* with each one point *increase* in the domestic private financial surplus as a percent of GDP corresponding to a 0.269 point *decrease* in the rate of change of RGDP per capita.

]]>Agreed.

]]>libertaer, If they are not in the government, how do they make monetary stimulus harder?

]]>“In the case of the UK, if you define the domestic private sector surplus as being equal to the “actual fiscal surplus” minus the current account surplus, what you’ll find is that the longest periods of time that the domestic private sector was in deficit was from 1954 through 1962 (9 years) and 1964 through 1971 (8 years).”

You only have to look at the BOE’s chart 13 (fiscal and current account balances) to see that the private sector was not in deficit for most of those years.

http://www.bankofengland.co.uk/publications/Documents/quarterlybulletin/qb100403.pdf (p.284)

I went through the data to calculate the “actual fiscal surplus” minus the current account surplus, i.e. the domestic private sector balance, for each of those years (according to the BOE), and found that in the two periods you mention the private sector was in surplus in every year except for the years 1955, 1969, and 1970, when it was in deficit.

]]>“…small fringe parties would have no influence. In Germany, for instance, the former communist party is toxic-no one will form a coalition with them. Small centrist parties will be influential, as they should be.”

AfD is considered toxic. Why? Because they want to exit the Euro. Their effect won’t be a Euro exit, but they will make the right monetary policy even less possible.

BTW, they got a lot of their votes from former communist party-voters.

]]>