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Will Rising Debt Lead us to Another 2008-like Crisis?
Tue, 7 Mar Pre-Open

The International Monetary Fund (IMF) recently published a Fiscal Monitor report titled- Debt: Use it Wisely. In the report, it examined the extent and makeup of global debt. The results were alarming. As per the report, the global debt has reached a record high in history. Here's a snip from the report-

  • At 225 percent of world GDP, the global debt of the nonfinancial sector-comprising the general government, households, and nonfinancial firms-is currently at an all-time high. Two-thirds, amounting to about $100 trillion, consists of liabilities of the private sector which, as documented in an extensive literature, can carry great risks when they reach excessive levels.

Yes, you read that right. 225% the size of the world economy. That's the level of debt in the world which is rising by the day. Also, the pace of growth in debt levels is something worth noting. Public and private debt rose from less than 200% of global GDP to 225% over the 15 years to 2015.

The chief problem driving this debt binge is the work of central banks and their credit policies. The central banks have been at it since 2008. In order to recover from the global financial crisis of 2008, centrals banks started framing unconventional monetary policies. They went on printing money and lowering interest rates. If you're interested in knowing what's really happening in the world of man and money, you can claim your free copy of Bill Bonner's latest book Hormegeddon

What were the result of these policies? As central banks went on to prod growth through stimulus measures and low interest rates, companies and individuals went on borrowing more. And the end result, as is seen today, the looming debt pile.

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The moot question is what can this rising debt levels mean for the global economy going ahead?

Rising debt can be a substantial impediment for the global growth, which already is tepid. Moreover, it also heightens the risk of financial crises ahead.

Slow economic growth has meant a rise in the debt burdens for companies across the globe. The debt here can be lowered by deleveraging. However, that too comes with its own risk. This we say is because deleveraging slows spending and investments by companies and in turn the economic growth. A catch-22 situation indeed.

That said, inaction surely may be costlier. Some steps can be initiated to revive the present situation before it gets too late. As the IMF suggests, there should be well-designed and well-targeted fiscal interventions. Also, fiscal policy cannot do the job alone. It has to be supported by complementary policies.

All in all, to really stimulate growth in the economy and lessen the debt overhang, what is needed is an actual increase in productivity rather than an artificial boost through monetary policy measures.

As for investors, the message is this- Don't fight easy money and play by the fundamentals to ride over the market volatility.

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Mar 19, 2018 (Close)