Be Your Own Global Macro Strategist

Tyler Durden's picture

While it is easier to listen to the narrative from world leaders and feel numb to the reality of it all, The Economist has decided enough is enough. Just as we earlier explained in simple bullet points the reality of the last few years in Europe (here), so The Economist provides this handy 'be your own global macro strategist' tool to comprehend just what magic the markets believe will occur going forward to keep debt levels under control across the world's governments... (e.g. all things equal, the country would need to grow by 7.7% a year, or nominal bond yields to fall to a Teutonic 0.5% to stabilize government gross debt at its 2011 level of 70% of GDP).



Via The Economist: The maths behind the madness

ALL EYES are on Spain ahead of the European Council's two-day meeting in Brussels beginning on October 18th. In just three short years, the country's horrendous housing bust and subsequent recession have caused government debt to increase from a sustainable 40% of GDP in 2008 to 70% of GDP in 2011. Despite brutal government spending cuts, by the end of this year the IMF forecasts government debt will reach 90% of GDP. The question of whether Spain will seek a bail-out preoccupies markets and policymakers alike.


Our interactive graphic above shows the IMF's latest forecasts (updated in October 2012) for government gross debt as a percentage of GDP through to 2017. It also allows you to input your own long-term assumptions to project the likely path of debt to 2020.


There are two things that matter in government-debt dynamics: the difference between real interest rates and GDP growth (r-g), and the primary budget balance as a % of GDP (ie, before interest payments). In any given period the debt stock grows by the existing debt stock (d) multiplied by r-g, less the primary budget balance (p).


The simple r-g assumption is one of the most important in debt dynamics: an r-g of greater than zero (when interest rates are greater than GDP growth) means that the debt stock increases over time. An r-g of less than zero causes it to fall.


Our interactive model uses the nominal interest rate (i) approximately equivalent to the ten-year bond yield and allows you to input your own inflation rate, ?. Inflation helps reduce the total debt stock over time, by reducing the real value of debt. In our model and using approximations, r-g becomes i - ? - g. The greater the inflation rate, the lower r-g becomes.


The second consideration is the primary budget balance. A primary budget surplus causes the debt stock to fall, by allowing the government to pay off some of the existing debt. A primary deficit needs to be financed by further borrowing. As European peripheral countries have found out to their cost, interest rates increase when governments run large budget deficits, and as they do it becomes increasingly difficult to reduce r-g to a sustainable level.


In reality, these variables are all related. When inflation rises, for instance, bondholders will expect a higher nominal interest rate on new debt. If a country runs a larger primary surplus, the interest rate it is forced to pay may fall. Adjustments in countries' deficits will also affect their growth rates. To keep matters simple, we have ignored these interactions. Our calculator shows the evolution of a government's debt stock based directly on the values for inflation, growth, interest rates and the primary deficit that you determine.


Spain has lots of work to do.


Keeping all things equal, the country would need to grow by 7.7% a year, or nominal bond yields to fall to a Teutonic 0.5% to stabilise government gross debt at its 2011 level of 70% of GDP.


Fat chance: the IMF forecasts GDP growth to average just 0.5% a year and bond yields of 7.7% between 2012 and 2017. A bail-out for Spain it seems, is not a case of if, but when.

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Robslob's picture


This message paid for by World Banks

Thank You,
The Overlords

darteaus's picture

Overlords never say "Thank You".

Peterus's picture

Talk is cheap.

It's much more profitable to talk nice, look smart and prop yourself on "consent" of the governed than ruling with an iron fist. Also, they don't need to stoop to saying it themselves, they have people to do it.

Ratscam's picture

Gentlemen, buenos noches

alstry's picture

Most lives are simply a journey to control or consume the production of others through various methods
Production can include just about anything from thoughts to behavior to actions leading to output...
The methods used for control generally fall under three catagories: Love, Trade(Money), and Force

Throughout history, it's not the money people's the production money controls people desire
With creative thinking and sustainable new innovations, technology can produce enough for everyone

It becomes an when we can milk off technology an not each other to get the production we want;)

 In the mean time, sit back and watch the economists try to dictate who should have control in a bankrupt world....



azzhatter's picture

Smaller, localized, reliance on self and neighbors, churches and community. This is life. Not a fucking Goldman Sachs predator in sight

Darkness's picture

I am a Macro-Strategist!! Don't put me out of a job!!

darteaus's picture

What magic occurs in 2014 for the US debt to stop increasing?

Coup by Ron Paul?

poldark's picture

Surely the amount of money you print affects the chart.

poldark's picture

Spanish bond yields are falling like a lead ballon without the ECB buying?? Now down to 5.5%.

falak pema's picture

I'll start beiieving in the sincerity of the Economist when they do a similar study on the UK economy...including its shadow banking!

Ghordius's picture

+1 just recently I was reading an article there about how the US is more productive than europe because it's more urbanized (more people live in cities and the cities are bigger). biggest generalization I've ever seen, particularly because it did not touch population densities. Or transportation systems. Or commuting patterns. Or whatever...

the ZH joke-comment on that: Ha! We europeans are more redneck than the Americans...