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Instead of paying down its debts, the world’s gone on another credit binge
Global debt has jumped by $57 trillion, or 17pc of global GDP, since the fourth quarter of 2007
Borrowing money to spend on goods and services shifts consumption from the future into the present Photo: Alamy
By Allister Heath
9:25PM GMT 05 Feb 2015
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95 Comments
So what, exactly, is going on in the global economy? The one big lesson from the bubble days was that we had too much debt. Yet fresh figures from McKinsey examining 47 of the world’s most important economies show that the situation has become worse rather than better. In net terms, there has been no deleveraging – in fact, economies have levered up further.
The figures are as remarkable as they are terrifying. Global debt – defined as the liabilities of governments, firms and households – has jumped by $57 trillion, or 17pc of global GDP, since the fourth quarter of 2007, which was supposed to be the peak of the bad old credit-fuelled days. In 2000, total debt was worth 246pc of global GDP; by 2007, this had risen to 269pc of GDP and today we are at 286pc of GDP.
It makes sense for people and organisations to borrow in a sustainable and sensible way; the antiquated idea that one should never be in debt is economically illiterate and nonsensical. But excessive debt reduces an economy’s flexibility and ability to cope when things go wrong. Companies and people are much more likely to go bust, taking banks down with them. A low-leverage economy inevitably does better in a downturn than a high-leverage one.
Yet debt has gone up as a share of national income since 2007 in all 22 developed economies in the survey, in some cases by more than half. So much for the supposed global quest for resilience.
The compound rate of growth in total debt was 7.3pc per year between 2000 and 2007; despite the Great Recession, this has barely slowed, with the growth rate only falling slightly to 5.3pc per year between 2007 and 2014. Even more depressingly, all categories of debt have risen: household debt has grown by 2.8pc a year since 2007, financial debt by 2.9pc a year, government debt by 9.3pc a year and corporate debt by 5.9pc a year.
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Only Argentina, Egypt, Saudi Arabia, Romania and Israel saw their overall non-financial private and public debt ratio fall since 2007.
There are a few pieces of better news amid the gloom. In Britain, consumers have actually deleveraged since 2007. The same is true of consumers and households in Ireland, Spain and the United States. All four nations bucked the rising trend in this category. But even here the picture isn’t entirely rosy. In the UK, surging house prices and insufficient housebuilding mean that homes are now out of the reach of many. This has reduced the number of new mortgages and thus the overall amount of debt – but for negative reasons. But while household debt is down in a few countries, it is up in Australia, Canada, Denmark, Sweden, the Netherlands, Malaysia, South Korea and Thailand.
Increasing debt is not always bad: some countries had too little debt, perhaps because they were still in the earlier stages of their development. Banking systems may not have been sufficiently developed to allow enough people to make use of them. In India, for example, tens of millions of people have been able to access properly sophisticated financial services for the first time over the past decade.
In such cases, a higher debt to GDP ratio ought to be seen as a good thing. But such exceptions to the rule are rare, and in the main the global debt explosion has been a net negative.
But while the detailed picture, especially for the UK, is not quite as terrible as the overall figures would suggest, they are nevertheless pretty grim. Borrowing money to spend on goods and services shifts consumption from the future into the present. One problem is that the bill eventually has to be paid, cutting resources that are available to spend in the future.
Another is that the “growth” this generates in the present is very different from that produced by a genuine increase in productive capital or a rise in productivity.
In extremis, increases in debt-fuelled consumption deliver an entirely artificial form of prosperity that eventually vanishes when the crash comes. This is partly what happened in the run-up to 2007, and one reason why the average worker today earns less than they did a few years ago. We thought we were richer than we were. Many British households have since partly readjusted to live more within their means, but this is not true globally.
Even more damagingly, it is clear that any consumer-sector deleveraging in the UK and US has been more than compensated for by a massive increase in government debt. One way of looking at this is that the debt still exists - but instead of being the responsibility of the private sector, it is now the responsibility of the state. Somebody will still have to pay for it: either taxpayers, or the whole population if it is eventually inflated away.
Given that nearly all government borrowing is used to finance day-to-day spending on consumer services or transfers, we are continuing to eat today what we will produce tomorrow. The government does spend on investment projects also – such as roads or railways that might be expected to yield future returns – but these tend to be of lower quality than private investment.
This is because state spending is determined in large part by whether it will buy enough votes or for the purposes of ensuring a footnote in the history books; private spending (including on capital investment) is determined by rates of return and other hard-nosed metrics. On balance, therefore, the economic activity generated by private debt tends to be better than that generated by government debt. HS2, the high speed train project, will add to the national debt; but it is a low-productivity prestige project and a gross misallocation of resources. By contrast, the myriad of smaller private sector capex projects might add to the corporate sector’s debt but they will do far more for the economy.
Last but not least, even financial debt has gone up – even though many large banks have slashed the size of their balance sheets. In theory, debt is fine if it is backed up by high-quality collateral. But as we found out in 2007-09, when markets dried up, liquidity vanished and the price of assets collapsed dramatically, if only temporarily, it can all go terribly wrong in practice.
If political tensions in the eurozone were ever to spiral out of control, and another massive financial shock to hit the global economy, it is hard to see how our ultra-leveraged economies could possibly have a chance.
Global debt has jumped by $57 trillion, or 17pc of global GDP, since the fourth quarter of 2007
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Borrowing money to spend on goods and services shifts consumption from the future into the present Photo: Alamy By Allister Heath
9:25PM GMT 05 Feb 2015
Follow
95 Comments So what, exactly, is going on in the global economy? The one big lesson from the bubble days was that we had too much debt. Yet fresh figures from McKinsey examining 47 of the world’s most important economies show that the situation has become worse rather than better. In net terms, there has been no deleveraging – in fact, economies have levered up further.
The figures are as remarkable as they are terrifying. Global debt – defined as the liabilities of governments, firms and households – has jumped by $57 trillion, or 17pc of global GDP, since the fourth quarter of 2007, which was supposed to be the peak of the bad old credit-fuelled days. In 2000, total debt was worth 246pc of global GDP; by 2007, this had risen to 269pc of GDP and today we are at 286pc of GDP.
It makes sense for people and organisations to borrow in a sustainable and sensible way; the antiquated idea that one should never be in debt is economically illiterate and nonsensical. But excessive debt reduces an economy’s flexibility and ability to cope when things go wrong. Companies and people are much more likely to go bust, taking banks down with them. A low-leverage economy inevitably does better in a downturn than a high-leverage one.
Yet debt has gone up as a share of national income since 2007 in all 22 developed economies in the survey, in some cases by more than half. So much for the supposed global quest for resilience.
The compound rate of growth in total debt was 7.3pc per year between 2000 and 2007; despite the Great Recession, this has barely slowed, with the growth rate only falling slightly to 5.3pc per year between 2007 and 2014. Even more depressingly, all categories of debt have risen: household debt has grown by 2.8pc a year since 2007, financial debt by 2.9pc a year, government debt by 9.3pc a year and corporate debt by 5.9pc a year.
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Only Argentina, Egypt, Saudi Arabia, Romania and Israel saw their overall non-financial private and public debt ratio fall since 2007.
There are a few pieces of better news amid the gloom. In Britain, consumers have actually deleveraged since 2007. The same is true of consumers and households in Ireland, Spain and the United States. All four nations bucked the rising trend in this category. But even here the picture isn’t entirely rosy. In the UK, surging house prices and insufficient housebuilding mean that homes are now out of the reach of many. This has reduced the number of new mortgages and thus the overall amount of debt – but for negative reasons. But while household debt is down in a few countries, it is up in Australia, Canada, Denmark, Sweden, the Netherlands, Malaysia, South Korea and Thailand.
Increasing debt is not always bad: some countries had too little debt, perhaps because they were still in the earlier stages of their development. Banking systems may not have been sufficiently developed to allow enough people to make use of them. In India, for example, tens of millions of people have been able to access properly sophisticated financial services for the first time over the past decade.
In such cases, a higher debt to GDP ratio ought to be seen as a good thing. But such exceptions to the rule are rare, and in the main the global debt explosion has been a net negative.
But while the detailed picture, especially for the UK, is not quite as terrible as the overall figures would suggest, they are nevertheless pretty grim. Borrowing money to spend on goods and services shifts consumption from the future into the present. One problem is that the bill eventually has to be paid, cutting resources that are available to spend in the future.
Another is that the “growth” this generates in the present is very different from that produced by a genuine increase in productive capital or a rise in productivity.
In extremis, increases in debt-fuelled consumption deliver an entirely artificial form of prosperity that eventually vanishes when the crash comes. This is partly what happened in the run-up to 2007, and one reason why the average worker today earns less than they did a few years ago. We thought we were richer than we were. Many British households have since partly readjusted to live more within their means, but this is not true globally.
Even more damagingly, it is clear that any consumer-sector deleveraging in the UK and US has been more than compensated for by a massive increase in government debt. One way of looking at this is that the debt still exists - but instead of being the responsibility of the private sector, it is now the responsibility of the state. Somebody will still have to pay for it: either taxpayers, or the whole population if it is eventually inflated away.
Given that nearly all government borrowing is used to finance day-to-day spending on consumer services or transfers, we are continuing to eat today what we will produce tomorrow. The government does spend on investment projects also – such as roads or railways that might be expected to yield future returns – but these tend to be of lower quality than private investment.
This is because state spending is determined in large part by whether it will buy enough votes or for the purposes of ensuring a footnote in the history books; private spending (including on capital investment) is determined by rates of return and other hard-nosed metrics. On balance, therefore, the economic activity generated by private debt tends to be better than that generated by government debt. HS2, the high speed train project, will add to the national debt; but it is a low-productivity prestige project and a gross misallocation of resources. By contrast, the myriad of smaller private sector capex projects might add to the corporate sector’s debt but they will do far more for the economy.
Last but not least, even financial debt has gone up – even though many large banks have slashed the size of their balance sheets. In theory, debt is fine if it is backed up by high-quality collateral. But as we found out in 2007-09, when markets dried up, liquidity vanished and the price of assets collapsed dramatically, if only temporarily, it can all go terribly wrong in practice.
If political tensions in the eurozone were ever to spiral out of control, and another massive financial shock to hit the global economy, it is hard to see how our ultra-leveraged economies could possibly have a chance.