How alarmed should we be about rising levels of debt?
According to the Institute of International Finance (IIF), global debt hit US$237 trillion in the December 2017 Quarter, over 310 per cent of GDP of US$76 trillion. Global debt levels are at record highs in dollar terms and in relation to GDP.
Even if we avoid potential double counting from the Financial Sector, gross global Public and Private Sector debt would still be US$178 trillion or 236 per cent of global GDP.
In the past decade, there has been a significant increase in Developed Economy Government debt, to 109 per cent of GDP, and this reflects GFC related stimulus programs and continuing budget deficits.
The following table, from the IIF, splits these figures by Sector and between Emerging and Developed Economies.
|US$ trillion||Emerging||% of GDP||Developed||% of GDP||Global||% of GDP|
|Public and Private Sector (no Financials)||53.6||177||124.8||274||178.4||236|
Many commentators argue that we shouldn’t be too alarmed with rising levels of indebtedness and their reasoning for this includes:
- Assuming asset value rises at the same rate as debt, the debt to asset ratio remains constant;
- While Chinese Private Sector Debt has surged in recent years (170 per cent of GDP), there will always be government support if there is a crisis;
- The rise in Emerging Market Private Debt (130 per cent of GDP) is supported by its younger demographics and higher growth potential;
- Near record low interest rates means that for the Household Sector, interest payments as a percentage of disposable income have declined dramatically over the past decade. In Australia, for example, this ratio has declined from 13 per cent to 8.5 per cent;
- With Japan’s 250 per cent Public Sector Debt to GDP ratio, around 40 per cent of Japan’s Government Bonds are owned by the Bank of Japan, so any increase in Japanese interest rates will simply see the interest expense repaid to the Government; and
- Central Banks will adopt a very gradual approach in any tightening cycle.
On the other side of the coin, it is worthwhile thinking about the record global debt levels and asking yourself questions like:
- What if US ten-year real rates of interest, which generally determines the allocation of capital between lenders and borrowers, returns to their multi-decade average of 3.5 per cent (versus the current 0.7 per cent)?
- What if the US economy continues to exhibit solid growth and the US Federal Reserve increases the Fed Funds rate from 1.75 per cent to over 3.0 per cent?
- What if those Emerging Markets with excessive US$ debt experience a dramatic decline in their currency (relative to the US dollar)?
- And one for Australia – with its number one positioning in the Household debt to GDP ratio exceeding 120 per cent, or more than double the global average – what if the price of assets (residential property) decline, bank’s provisioning for bad and doubtful debts increase and unemployment rises from this negative feedback loop?
While my grasp of timing is no better than the next person, I do know that excessive debt levels magnify trouble when things don’t work out as planned.According to the Institute of International Finance (IIF), global debt hit US$237 trillion in the December 2017 Quarter, over 310 per cent of GDP. How alarmed should we be about the amount of debt? Click To Tweet