The conclusion of the recently released 16th Geneva Report on the World Economy is that debt is the Achilles heel of our cyclical recovery. The Geneva economists warn that, despite the widespread belief that a general deleveraging has occurred due to the Great Financial crisis, aggregate global debt levels are considerably higher today than they were when the crisis began. The economists rightly worry that this debt will precipitate another global economic crisis at some point in the near future. Some thoughts below
Given that the last piece I wrote here at Credit Writedowns was on private debt overhangs and the business cycle, I find the Geneva report conclusions enlightening. To continue the framing from that piece, I would say that the broad macro picture is one of elevated financial fragility in advanced economies due to stretched household balance sheets. Governments in those economies have been moderately successful in mitigating the destabilizing impact of household balance sheet debt stress by socializing losses through bailouts and other forms of government support and by deficit spending where private deleveraging has occurred.
The net impact, then of the Great Financial Crisis, has been to shift debt burdens onto government balance sheets where, due to government’s taxing power, the debt is most easily borne. At the same time, to the degree household balance sheets have been strained, the cash flow implications have been lessened significantly by the wholesale reduction in interest rates across advanced economies.
This is not an environment of robust growth, however. The goal of policy makers has been to allow creditors to receive as much net present value from their loans as possible, which means minimizing debt relief, retarding consumer spending growth. As wages are stagnant, only through some modest releveraging have consumers been able to maintain the consumption growth that has supported recovery.
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