The best way to see which country will suffer from a financial crisis is to look to see where households and businesses are overspending compared with their income.
Jan Hatzius, the chief economist at Goldman Sachs, told a Boston Fed conference that the two countries most at risk are the U.K. and Canada.
To gauge risk, Hatzius favors the private-sector balance, which is the similar to the more familiar government budget deficit. It is simply the difference between total savings and total investments of all households and businesses.
A chart of the U.S. private sector-balance going back to the 1960s clearly shows the equity bubble of the late 1990s and the housing bubble of the mid-2000s.
“I think the private-sector balance is quite an intuitive yardstick for whether big increases in asset prices and big increases in debt are resulting in basically overspending by households and firms relative to their income,” Hatzius said.
“It’s been quite helpful,” he added.
Measuring only the growth of debt to predict bubbles can be misleading because it can be driven by more structural factors, Hatzius said.
At the moment, the private-sector balance in the U.S. is positive and above its historical average.
By contrast, Canada has seen house price appreciation and is now overspending, Hatzius said. And the U.K. private sector is also spending more than its income, which adds to “already significant uncertainties surrounding U.K. economy on eve of Brexit,” Hatzius said.
Hatzius said he was “less concerned” with Australia because the private sector deficit is well below its long-term average.
The exact calculation for the U.S. is (gross private saving – gross private domestic investment + statistical discrepancy)/GDP). The data can be found on the BEA website in Table 5-1.
For emerging market economies, Hatzius noted that the current account deficit, which includes the government sector, has been used to forecast crises. Data availability is an issue for emerging-market economies, he added.
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