I believe that last chart and its conclusion has an affinity to the lead up to the dot-come bubble. Could you kindly explain chart 1. What is a account balance, a budget balance, and a twin deficit and what does this say about Canada, which seems in the middle.
Hi - Budget is referring to government spending and current account is referring to a country's transactions with the rest of the world (e.g. trade). When either (or both) are negative (aka in deficit) the government/country must seek financing to pay for its additional expenditures. This has the potential to weaken a country's economic standing if it has a hard time finding willing lenders. This willingness might be illustrated by the country's bond yields and currency performance. In Canada, bond yields are low and the dollar is fairly stable suggesting no immediate issues with financing. However, persistent twin deficits could eventually lead to problems.
Thanks. So budget is the spending internal to the country (with the exception perhaps of aid and foreign affairs) while current account reflects the trading surplus or deficit vis-a-vis other trading partners. One is a measure of state spending and the other of market trade? One of the elements predicting a economic collapse in Rogoff's book "This Time is Different" is current account balances. Along with a few others like domestic debt.
Good to know. Although is it not the case that the stability of financing could itself lead to a kind of moral hazard - i.e., governments know they'll get financing so they spend more. I read somewhere this is largely what the US did after the 2008 Global Recession.
I think anyone (or any country) with a seemingly limitless access to financing is going to overspend. It's America's 'exorbitant privilege', as the global reserve currency. However, many other countries have gone (are going) down this path, successfully so far. But for how long?
Many in the past have borrowed to excess and eventually failed, often because their overspending was tied to borrowing in USD and (due to a weakening current account) they lacked to FX reserves to repay debt, thus hitting a financial brick wall. This is why many emerging market stocks do poorly when the USD is appreciating.
I believe that last chart and its conclusion has an affinity to the lead up to the dot-come bubble. Could you kindly explain chart 1. What is a account balance, a budget balance, and a twin deficit and what does this say about Canada, which seems in the middle.
Hi - Budget is referring to government spending and current account is referring to a country's transactions with the rest of the world (e.g. trade). When either (or both) are negative (aka in deficit) the government/country must seek financing to pay for its additional expenditures. This has the potential to weaken a country's economic standing if it has a hard time finding willing lenders. This willingness might be illustrated by the country's bond yields and currency performance. In Canada, bond yields are low and the dollar is fairly stable suggesting no immediate issues with financing. However, persistent twin deficits could eventually lead to problems.
Thanks. So budget is the spending internal to the country (with the exception perhaps of aid and foreign affairs) while current account reflects the trading surplus or deficit vis-a-vis other trading partners. One is a measure of state spending and the other of market trade? One of the elements predicting a economic collapse in Rogoff's book "This Time is Different" is current account balances. Along with a few others like domestic debt.
Good to know. Although is it not the case that the stability of financing could itself lead to a kind of moral hazard - i.e., governments know they'll get financing so they spend more. I read somewhere this is largely what the US did after the 2008 Global Recession.
I think anyone (or any country) with a seemingly limitless access to financing is going to overspend. It's America's 'exorbitant privilege', as the global reserve currency. However, many other countries have gone (are going) down this path, successfully so far. But for how long?
Many in the past have borrowed to excess and eventually failed, often because their overspending was tied to borrowing in USD and (due to a weakening current account) they lacked to FX reserves to repay debt, thus hitting a financial brick wall. This is why many emerging market stocks do poorly when the USD is appreciating.