The world is $199 trln in debt, and growing
The world’s economies may have improved since the financial crisis, but now more than ever, the world is drowning in higher and higher debt. A new report from the McKinsey Global Institute suggests that the world has added $57 trln in debt since the financial crisis. The firm pointed out that all major economies currently have higher levels of borrowing relative to gross domestic product (GDP) versus the year 2007, right before the Great Recession and financial crisis. The net global debt added since then is now projected as a ratio of debt to GDP to be up 17 percentage points.
The new total of global debt, as of the end of the second quarter of 2014, is a whopping $199 trln. This massive number compares to $142 trln at the end of 2007, and it compares to a mere $87 trln at the end of 2000.
McKinsey’s report highlighted three areas of emerging risk that all of this new debt poses. First is the rise of government debt, and second is the continued rise in household debt - and housing prices - to new peaks in Northern Europe and some Asian countries. Third is the quadrupling of China’s debt.
Before you think that this ballooning debt applies only to governments, it does not. This also applies to households, corporations and financial-related debt.
McKinsey further warns that global
household
debt
is reaching new peaks. It was only in nations like the U.S., the U.K., Ireland and Spain where households have actually deleveraged since the financial crisis. The total household debt in other nations, including the household debt-to-income ratios, have continued to rise. These nations with higher debt were said to include nations such as Australia, Canada, Denmark, Sweden, the Netherlands, Malaysia, South Korea and Thailand.
Government debt has grown by $25 trln in seven years and the research warns “to reduce government debt, countries may need to consider new approaches, such as more extensive asset sales, one-time taxes on wealth, and more efficient debtrestructuring programme.”
Globally, the scariest figure by far has to be that China’s debt has quadrupled since 2007. This was driven by real estate and shadow banking, up to 282% of GDP. If you want to put this in perspective, this figure is larger than the United States or Germany.
McKinsey’s three warnings on China are as follows: half of all loans are somehow linked to China’s overheated real-estate market; unregulated shadow banking accounts for nearly half of new lending; and the debt of many local governments is probably unsustainable. The only good news is that China’s government is believed to have the capacity to bail out the financial sector if a property-related debt crisis develops. But in terms of total debt to GDP for some of the major nations, that debt includes government, financial institutions, corporate (non-financial) and households.
Anyhow, arguments of this sort can carry on forever. It is ultimately hard to know how the unwinding of all this debt will occur. Four paths to begin government debt deleveraging were identified as follows: make fiscal adjustments to reduce or eliminate fiscal deficits, accelerate GDP growth through productivity improvements, raise inflation targets or restructure debt.
If the global debt load is still growing, and if the $199 trln debt was as of the second quarter of 2014, then the global debt load by now is really over $200 trln. Food for thought.