It’s not the biggest item in the international news, but it’s still the elephant in the roomby George Magnus / October 10, 2016 / Leave a comment
At a large investment conference in Edinburgh last week to discuss a range of economic issues, I was surprised that no one formally raised the topic of debt. Additionally surprised, I’d say, because the IMF reminded us on Wednesday that world debt rose last year to a record $152 trillion, twice as high as it was in 2000, and equivalent to an all-time high of 225 per cent of world GDP. Debt clearly isn’t the most newsworthy item right now, but it is a big elephant in our proverbial global economic and political room.
Debt is a big issue
The build-up in debt over the last decade or so, analysed across 113 countries that account for 94 per cent of world GDP, has been the largest ever in peacetime. It is important because we know that debt cycles cannot continue forever. Households and companies may find that the value of liabilities outstrips that of their assets, or that they face debt servicing requirements greater than their future repayment capacity. Governments, except for those in the Eurozone, have the option to print currency to sustain debt and debt service obligations for longer but even in this case, they cannot accumulate debts ad nauseam. Sooner or later someone, usually taxpayers, has to pay the bills.
The trouble is, as we saw vividly in and after 2008, that when debt bubbles burst, the consequences can be highly damaging. A large transfer of debt from the private to the public sector has taken place, and the hangover of large debt burdens has placed a strong and enduring dra…