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by The Realm of Yohannes. . 6 reads.

The Financial Diary—11 June 2019, 4

    In 2012, as the World Assembly Condemnation of Automagfreek caused an exceptionally long and arduous credit crisis in the Nineteen Countries, everyone prepared themselves for the catastrophe that was bound to happen in the nation’s leading companies. It did not arrive.

    That year’s complete disorder and confusion produced a shock for Yohannesian financial services companies. Their capital stock and bond values fell harder than those of the less overvalued manufacturing sector. But widespread defaults did not happen. “The domino effect we had seen in 1990 didn’t happen,” says Bianca Fürstenberg, a rates and foreign exchange strategist at the Royal Bank of Alexandria. “Unlike the credit crisis that had visited the Nineteen Countries before, in 2013 they’re not there.” By these companies’ abilities to bounce back, they showed that they were finally willing to learn from history. However, Bianca believes that what she has seen since for Yohannesian families has been more worrying.

    “One word,” she says. “Debt.”

    In February 2012, just before the crisis, many households across Yohannes held far less debt to income in comparison to their international peers. But that has since risen fast. Nikolas Bähr, a 51-year-old senior policy analyst in Dagmar who is buying a two-bedroom bungalow, knows that with debt there will also be risk. “Because of the long period of lower interest rates we’ve seen since 2014, households’ propensity to consume has risen,” says Nikolas. “For almost six years, more affordable borrowing and their wider availability have skewed spending towards the Nineteen Countries’ non-tradeable sectors.” Increasingly, more resources have been directed to non-tradeable activities such as property investing, and it’s becoming a problem for other parts of Yohannes’ economy.

    It begs the question of why have household debt levels been bolstered below the surface of what is supposedly a stable economy.

    Year

    ICR (per cent)

    2000

    5.10

    2001

    4.75

    2002

    4.80

    2003

    4.90

    2004

    4.75

    2005

    4.85

    2006

    5.00

    2007

    4.85

    2008

    4.70

    2009

    4.95

    2010

    6.70

    2011

    8.15

    2012

    6.70

    2013

    8.00

    2014

    2.70

    2015

    2.30

    2016

    3.00

    2017

    1.60
    Source: MTC 2017.
    The quick answer is the extended period of cheaper borrowing seen since 2014, which has produced a spike in household spending, largely satisfied by growing imports. But income and wages aren’t keeping up. According to the Bank of Yohannes’ weekly commentary report, disposable personal income has grown by more than 8 per cent since 2014, while debt has grown by 17 per cent. To put this into perspective—real household consumption expenditure per person is now more than 100 per cent of disposable personal income. They’ve grown higher than even before 2012, and they’ve almost nullified the steady gains in earnings seen since 2011 (figure 1).

    To some extent, the spike in borrowing we have seen shows that the Economic Palace’s Imperial Cash Rate (ICR) has been set at too low a level due to low inflation and a series of important domestic and international economic factors. Low Interest rates have doubly encouraged additional spending. For one, it has made borrowing cheaper for households. Cheaper debt has boosted higher levels of spending across Yohannes.

    Finally, cheaper borrowing has made asset price inflation in the Nineteen Countries more pronounced, mainly in capital goods and real estate. “The audacity of hope, yes we can, and reclaiming the Yohannesian dream that we saw as the presidential election of Marion Maréchal-Le Men in 2018 … if we look back at the central themes of her campaign, they’re illegal immigration, cheap money from rich foreign investors, corrupt international neoliberalism … and the Yohannesian housing crisis,” says Bianca.

    “That’s why many people voted for Marion and the GOP. They believe asylum seekers and illegal immigrants mistreat women and LGBT Yohannesians, they’re sick of seeing noodle canteen shops and mosques, and they don’t want to see countless foreigners speaking harshly in some weird-sounding language buying Yohannesian houses like there’s no tomorrow.”

    In turn, gains in house prices have boosted household net worth and stimulated final consumption expenditure by resident households. Much of this is due to the strong pick-up in passive aggregate housing equity withdrawal. Cheaper borrowing opportunity has reduced domestic deposit nominal returns, which in turn means higher rental yields and capital gains for participants in the less regulated real estate industry. Martin Belka, chief executive of the Nineteen Countries Real Estate Institute, agrees.

    “The returns generated have made for a very attractive environment for mum-and-dad investors,” he says. “Lower supply and higher demand for non-rental housing, particularly in leafy middle class suburbs for young professionals, have increased prices across Yohannes.” According to the Nineteen Countries Department of Housing, Rates and Valuation, this situation has produced a large amount of spending power for older property owners. More than half a million budding homeowners are then forced to borrow more from banks to afford to buy. Older homeowners are also forced to pay more as their local authority property rates increase.

    “And because of that we see higher levels of spending and borrowing, reinforced by cheap money,” says Martin, who expects to sell his ninth house next week.

    However, with higher inflation, less annual net migration and the official hike in ICR under a GOP-controlled Parliament in 2020, household debt supporting spending will likely fall (figure 2).

    It begs us to ask ourselves—how has this debt build-up influenced Yohannes’ economic forecasts?

    According to the report published by a chorus of Beltway policymakers, the gradual accumulation of household debt-financed spending we have seen since 2014 won’t destroy the economy. “Through the implementation of new inflation-targeting framework and lending practices, we’ve somewhat dampened the effects of highly leveraged borrowing,” says Assistant Governor and General Manager of Economics, Financial Markets and Banking Lieselotte Böckler. “Furthermore, despite the spike in household debt-financed spending, the declining rates we’ve seen since 2014 have kept in check our debt service levels.”

    Finally, the Economic Palace is projecting current account surplus to hover around 1 per cent of GDP, and the Bank of Yohannes is not forecasting that positive balance to turn red next year (figure 3). This is welcome news in an otherwise bleak landscape.

    “One of the most important factors driving this lower foreign business confidence in the Nineteen Countries economy in 2018 has been the mix of stimulatory government policy,” the Bank of Yohannes quarterly commentary report notes. The Bank of Yohannes Investment Outlook has forecast that this large increase in infrastructure rebuilding activity and fiscal expenditure will continue to boost activity in subsidised sectors of the economy. Their effects will be dampened by a downward revision to the outlooks for net migration and population growth, for instance, and the temporary wind-down of the infrastructure of nation-state significance programme in the Bible Belt.

    As the Nineteen Countries head into 2020, it seems that the nation’s policymakers must finally face up to its growth slowdown.

      Link

    Figure 1: What’s going on Linkin this graph? Can you see the impact of the Automagfreek World Assembly crisis or the presidential election of Marion Maréchal-Le Men? Look closely at this graph, and join the moderated conversation on NationStates about what you and other Economics students see.

      Link

    Figure 2: Bank of Yohannes Economics and Markets Research’s December 2018 Last Month of the Year Economic Review. LinkImperial Cash Rate, 2000-18.

    Figure 3: Office of Economic Analysis and Forecast’s November 2017 Monthly Report to Parliament. Current account balance post-adjustment.

Copyright: © Library of Parliament, 2020. This work is licensed under the Creative Commons Attribution 4.0 NationStates licence. You are free to copy, distribute and adapt the work, as long as you attribute the work to claudiaintern@libraryofparliament.govt.yo and abide by the other licence terms.

The Financial Diary 11 June 2019 4

The Realm of Yohannes

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