Debt and the Politics of Deleveraging
by David Van Meter, MS.Acc., Ph.D.
The headlines this summer are full of news about the default in Greece, and the pundits have filled our ears with all manner of scenarios for how this could impact the future of the European Union, as well as how it could impact the economy and the capital markets. Indeed, banking and monetary crises anywhere in the world are never a matter to take lightly, and we will follow this course of events closely.
But I would like to look beyond the headlines for a moment, and address a broader issue that promises to impact our economic well-being even more profoundly than the immediate political storm in Greece. Specifically, I want to make you aware of the growing chorus of concerns over debt levels around the world, and the prospects for widespread governmental and household deleveraging.
In February of 2015, the McKinsey Global Institute released a study called "Debt and (Not Much) Deleveraging" that quantifies the extent to which global economic debt has risen since the financial crisis of 2008. Around the world, debt has grown by $57 trillion since 2007 as governments financed a broad and imaginative array of stimulus programs with borrowed money. Debt to GDP ratios have soared in both developed and developing economies: Japan leads the pack of indebted nations, with a 400% total economic debt to GDP ratio (government debt alone is 234% of Japan's GDP), while numerous other nations from Denmark to Greece to Ireland to Singapore, and more, have total debt to GDP ratios over 300%. China is quickly playing catchup in this metric, having quadrupled its overall debt load in the past seven years, with over 50% of those loans being linked to real estate.
Household debt has soared around the world as well, particularly as easy money in the first decade of the century encouraged widespread participation by more people in the real estate markets. In only four countries have household debt levels actually decreased since the financial crisis: the USA, Britain, Spain and Ireland.
Why should we be concerned by these statistics? Governments in particular are under pressure to reduce their debt loads as the impact of the financial crisis passes. Yet as the world population ages, governments are also under pressure to maintain safety nets, pensions, and social services spending at levels that arguably cannot be sustained without more debt. This is precisely the dialectic that has fueled the political unrest in Greece.
Sadly, even if they had the will to reduce debt through normative means such as budgetary restraint, asset sales, increased taxes, and economic growth, many of the most indebted nations are probably too deep in the hole for such measures to work in isolation. Thus we expect to see more nuanced arguments put forth in academic and political circles that urge governments to deleverage by inflicting a disproportionate share of hardship on their lenders and bond owners, through such means as mandated restructurings, write-downs and possibly even repudiations. If you would like a glimpse of the form such arguments may take, visit the web page of the socialist-leaning and outspoken Committee for the Abolition of the Third World Debt, www.CADTM.com.
For over thirty years we have enjoyed an historic period of stability and prosperity in the bond and money markets. As households, corporations, governments and in some cases entire national economies seek to come to terms with the problem of too much leverage, the holders of debt instruments will increasingly become caught up in the crossfire between advocates of private property rights and champions of radical measures to deleverage the world. As always, we encourage you to speak with us regarding how such macroeconomic and political concerns may affect your financial future.