Global Macro Monitor 
Global Macro Economic & Market Overview



Outlook
  • Both the world economy and its riskier assets –– equities, credit, and commodities –– are sitting uncomfortably in between expansion and recession, as most observers see close to even odds of either digital outcomes. Economies typically do not stay there, though, creating a very unstable environment for markets with prices lurching up and down on the slightest hint that either rebound or contraction is becoming the more likely outcome. Continued high uncertainty is a likely outcome of the current situation as the global macro economic picture shifts across states.  Heads of states will remain for 2013 a main source of risk as they commit to the main elements of resolution: Greek, Spanish and Irish debt reduction, bank recapitalization, wider liquidity and funding support for Euro members, and stronger coordination and constraints on future deficits and debt.

A simple and intuitive interactive guide to government-debt dynamics
  • Dynamics of government gross debt as a percentage of GDP.
    • 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. The Economist's interactive model below uses the nominal interest rate (i) approximately equivalent to the ten-year bond yield and allows you to input your own inflation rate, π. Inflation helps reduce the total debt stock over time, by reducing the real value of debt. Their model utilizes approximations, r-g becomes i - π - 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. The Economist's 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.
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