Global Debt Spinning Out of Control
Economic commentator Jeremy Warner has published a new piece in which he argues that the world economy is overwhelmed with public and private debts. He believes one of the only ways out of this dire economic situation is some form of mass default across the globe. Warner writes:
You might have thought that a financial crisis as serious as that of the past seven years would have ended the world economy’s addiction to debt once and for all. It has not. If anything, the position has grown even worse since the collapse of Lehman Brothers…”
Warner looks first to Argentina as an example. President Cristina Fernandez de Kirchner claimed Argentina is the only country in the world to have reduced its debt. Warner points out that this happened through default, not responsible fiscal planning. He thinks other nations mired in debt will soon follow Argentina’s unfortunate lead:
Nonetheless, where Argentina treads, others will surely soon be following. The world is sinking under a sea of debt, private as well as public, and it is increasingly hard to see how this might end, except in some form of mass default.
Greece we already know about, but the coming much wider outbreak of debt repudiation will not be confined to sovereign nations. Last week, there was another foretaste of what’s to come in developments at Austria’s failed Hypo Alpe-Adria-Bank International. Taxpayers have had enough of paying for the country’s increasingly crisis-ridden banking sector, and have determined to bail in private creditors to the remnants of this financial road crash instead – to the tune of $8.5bn in the specific case of Hypo Alpe-Adria. Finally, creditors are being made to pay for the consequences of their own folly.”
The debt outlook across the globe is bleak. Warner shares some of the statistics that should give optimistic forecasters pause:
- Total global debt has grown 17% since 2007.
- Public debt of the G7 countries has reached 120% of GDP since 2007 – nearly 40% growth.
- The phenomenon is not unique to the West. China’s debt has quadrupled since 2007.
Warner doesn’t believe the majority of this debt can be legitimately repaid. Governments will likely try to inflate away their problems by printing money through their central banks. But this is just a short-term solution. No matter how much governments devalue their currencies, a bigger bust than the last financial crisis is on its way.
Global debt cycles and credit booms have very long timelines. During this time, financial institutions forget the risk management lessons of the past and “go for broke,” hoping that extending enough credit will lead to enough economic growth to repay the debts. This attitude will lead to a disastrous outcome.
In the early 19th century, more than half of UK incarcerations were for unpaid debts. The debtors’ prisons were filled to bursting. Then came the realisation that excessive debt was as much a problem for the creditor as the debtor, proper bankruptcy laws were introduced, and mechanisms for burden sharing put in place. Creditors found it harder to demand their pound of flesh.
“Yet when the problem is as big, and international, as it is today, such solutions become virtually impossible, and unilateral default much more likely. How might the present explosion in debt end? The only thing that can be said with certainty is ‘badly’.
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