"What the crisis made abundantly clear is that private and public debts cannot be looked at only in isolation," say the authors of "Sovereigns Versus Banks: Credit, Crises, and Consequences." In this working paper, Òscar Jordà, Moritz Schularick, and Alan M. Taylor study the co-evolution of public and private sector debt in advanced countries since 1870. To do so, they use a new dataset covering 17 countries and 140 years.
Which concludes:
Next, they classify recessions as either "normal" recessions or recessions associated with a financial crisis, and examine the cyclical public and private debt patterns associated with each. They find that private credit booms, not public debt booms, are the main precursors of financial instability. While public sector debt has little influence on whether a financial crisis will occur, it does seem to matter for the speed of the recovery after a financial crisis. High levels of public debt are correlated with slower recoveries, which the authors contribute to fiscal space constraints, or less room to maneuver with fiscal policy.
is this important? Absolutely because it talks about fiscal constraints, which in a general terms means not all the transactions we need fit onto the yield curve, we lack bandwidth. This break down in public debt occurs, as I repeatedly state, when the roll over period of the debt is about equal to the historical business cycle. (I am allowed to use cycle theory here). That is our condition today, and DC is not ready for the next recession. The business cycle is ending early, we are entering a short recession and on coming out of the recession we have Delong's war budget with deficit at 15-20% of GDP.
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