The IMF’s recent warning should be taken very seriouslyby George Magnus / April 23, 2018 / Leave a comment
Global public and private debt, according to the International Monetary Fund, reached $164 trillion in 2016, the equivalent of 225 per cent of global GDP. This is almost $50 trillion more than in 2007. In advanced economies, the level of debt as a share of GDP was higher in 2016 than at any time since World War Two, while in emerging and middle income countries the debt share was at its highest since the Asian crisis in 1997-98. By the end of this year, the world will be still deeper in debt. Is this the next economic crisis?
The IMF warning isn’t new, and Cassandras have warned since the financial crisis that debt would be the ruin of the global economy. Some of the biggest global debtors, such as the United States, China and Japan have been living with large debt for a long time without risk of imminent crisis, and so the notion that rising global debt is going to tip the world into another systemic financial crisis is misguided. That said, it would be wrong to be complacent. Some countries, especially in the emerging world, could be at significant risk from taking on excessive debt, and we should all be aware that high debt makes governments, companies and households especially vulnerable in the event that other things should go wrong, which well they might.
Remember what happened in the 2000s. For the best part of a decade, levels of private sector debt rose relentlessly, especially debt owed by households, mostly mortgages. Leverage in the financial sector, that is borrowing to finance loans and investments rose to absurdly high levels, especially in relation to the limited capital of financial institutions. No one worried while asset prices, including housing, rose, liquidity was plentiful, and interest rate costs remained low. Once these benign conditions changed, though, as they were bound to, the proverbial pack of cards of debt collapsed with devastating effect.
Fast forward to 2018, and here we are again, with four important differences.
First, while debt is now significantly higher, the tighter regulatory environment has lowered the riskiness of banks to a meaningful, if not totally satisfactory, extent. While a large debt burden is liable to make any economic downturn more painful for governments, banks and individuals, there is less risk of a repeat systemic financial crisis. Good news—but that’s where it stops.