This is the last part of a series I wanted to do to look at countries that have had debt crises in the recent past. The first one was obviously Japan, but I also wanted to explore other plausible scenarios.
And that led me to Thailand. The Asian debt crisis in ’97 is widely assumed to have started in Thailand, with real estate and bad loans (and I’d bet even worse underwriting) being the issues that led the Thai government to eventually float the Thai bhat. Are you sensing a theme, here? Sloppy underwriting, real estate speculation, should I go on?
At any rate, I wanted to look at Thailand because after the 3.5% GDP print, it became evident we could be dealing with a shift in aggregate output (i.e. actual GDP & potential GDP). Here’s a chart of Thailand’s GDP, post debt crisis:
I drew in the dotted lines to show you the changes in the trajectory of GDP. It keeps shifting lower and to the right. Which means the economy as a whole is less & less productive and standards of living are not rising like they were in the past. In fact, they could be falling. But what about unemployment?
And of course, there’s the labor force to consider:
So you have more people working and their economy is producing less. All the while the government is taking on more & more debt:
To explain, this chart is a moving 12-month total of net lending/borrowing by the Thai government. A line at 0 would mean the government was balanced – neither a saver nor a borrower – just a conduit. But as you can see, they’ve tended to be a net borrower.
Just like us. Actually that’s wrong. The Thais may be a debtor nation, but we wrote the playbook and the appendices on how to do it.
So, after looking at Japan and Thailand, what do we come away with as big picture macro themes if our recovery follows one of the two?
If it’s Japan, we tread water in terms of aggregate output, unemployment rises and goes higher because of improving efficiency while the nation continues to age (the retirement of the baby boomers is imminent), all the while the government continues to spend money it can’t recover (persistent and rising deficits). Sovereign credit ratings will be impacted at some point, yet the Yen hasn’t collapsed – yet. Probably because domestic demand for Japanese gov’t. bonds (JGBs) has forced Yen to be brought back to Japan and put to work in JGBs earning 100bps.
If it’s Thailand, the economy grinds higher in terms of aggregate output, but at lower and lower rates of efficiency and standards of living improve at lower rates over time. The labor force may continue to expand, and in my mind that one fact seems to be the difference maker between stagnating GDP and expanding GDP, albeit with a significant shift from its previous growth path.
Neither outcome is certain, but both are certainly ugly. Both certainly speak to a more activist government in the economy, and innovation and new business creation that gets stifled at a minimum. And since small, private businesses are the backbone of job creation and provide the spark for innovation, that doesn’t bode well for our future economic landscape.