April 2015 – ECONOMY – The world has been on a debt binge, increasing total global debt more in the last seven years following the financial crisis than in the remarkable global boom of the previous seven years (2000-2007)! This explosion of debt has occurred in all 22 “advanced” economies, often increasing the debt level by more than 50% of GDP. Consumer debt has increased in all but four countries: the US, the UK, Spain, and Ireland (what these four have in common: housing bubbles). Alarmingly, China’s debt has quadrupled since 2007. The recent report from the McKinsey Institute, cited above, says that six countries have reached levels of unsustainable debt that will require nonconventional methods to reduce it (methods otherwise known as defaulting, monetization; whatever you want to call those measures, they amount to real pain for the debtors, who are in many cases those least able to bear that pain). It’s not just Greece anymore. Quoting from the report:
Seven years after the bursting of a global credit bubble resulted in the worst financial crisis since the Great Depression, debt continues to grow. In fact, rather than reducing indebtedness, or deleveraging, all major economies today have higher levels of borrowing relative to GDP than they did in 2007. Global debt in these years has grown by $57 trillion, raising the ratio of debt to GDP by 17 percentage points (see chart below). That poses new risks to financial stability and may undermine global economic growth. I began a series on debt a few weeks ago, and we return to that topic today. I believe the fundamental imbalances we are seeing in the world (highlighted in the two papers mentioned above) are the result of the massive increases in global debt and misunderstandings about the use and consequences of debt. Too much of the wrong kind of debt is going to be the central cause of the next investment crisis. As I highlighted in my February 24 letter, the right type of debt can be beneficial. However, as the McKinsey Report emphasizes, High debt levels, whether in the public or private sector, have historically placed a drag on growth and raised the risk of financial crises that spark deep economic recessions. –Business Insider
Major economic indices are now showing troubling signs. The U.S. stock market is on a giddy euphoria trip just like the Twenties’ U.S. stock market was before the 1929 crash. Fed policies are pushing equities markets into unprecedented territory, but this money is only servicing the wealthiest 1% of the population. Banks are exacting more fees than ever on consumers for servicing their money. Does this sound like a economic boom time for banks to you, despite the fact that the U.S. stock market has been on a tear since the Fed began quantitative easing? Banks are up to their eyeballs in debt and CDS(s). In 1929, U.S. banks caused the market to crash due to over-speculation and bad loans. Today, Central Banks, credit markets, bond, and equity markets are repeating the same mistakes.