Former director of the Office of Management and Budget said we’re facing a
“debt supernova“. Former Fed chief Alan Greenspan said recently. Debt, deficits and entitlement programs are all
coming to a head in a few months, all over the world. The European chief executive of Goldman Sachs Asset Management warns: There is too
much debt and this represents a risk to economies.
The demographics in most major economies –
including the US, in Europe and Japan – are a major issue – and present us with
the question of how we are going to pay down the huge debt burden. With life
expectancy increasing rapidly, we no longer have the young, working populations
required to sustain a debt-driven economic model in the same way as we’ve
managed to do in the past.
The world’s most prestigious financial institution, the Bank of
International Settlements (BIS) – known as the “Central Banks’ Central Bank”
– writes: We are not seeing isolated tremors, but the
release of pressure that has gradually accumulated over the years along major
fault lines …
The sum of non-financial private and government
debt has not fallen since the crisis …. Total debt in advanced economies has continued to expand (by 36 percentage points of GDP since 2007), with
some exceptions mainly reflecting the recent decline in private sector debt in
a limited number of countries. Meanwhile, total debt in emerging market economies
has risen even more (by 50 percentage points).
Aggregate private debt has barely stabilized,
let alone started to correct downwards, even in the corporate sector. And
government debt continues to rise steadily, in a manner reminiscent of Japan’s
trend deterioration in the 1990s.
BIS notes that this is a recipe for disaster: Early warning indicators of banking stress
pointed to risks arising from strong credit growth …. Credit-to-GDP gaps – the
deviation of private sector credit from its long-term trend – were well above
10% in Brazil and China. This ratio was also above 10% for a number of [other]
countries … including Indonesia, Singapore and Thailand …. In the past, two thirds of all readings above
this threshold were followed by serious banking strains in the subsequent three
years. It’s not just conservatives who think that debt is
too high. Liberals think so as well.
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