Debt and Debtors: A Global Picture of Deleveraging, Part I
And forgive us our debts, as we forgive our debtors.”
-The Lord’s Prayer in the English Bible
Debt is the poisoned root for the global economy and financial markets. It is the big substructure that all investors must weigh, the deflationary gravity that will push down equity, commodity, and all risk-asset prices (despite the current sugar rush from unsustainable monetary policies). Deleveraging means paying off debts; and mind you, risk-taking and economic growth cannot occur if debts are too high. We go into the visual details in this post.
The McKinsey Global Institute (MGI) has come out with a superb report on global debt and deleveraging, available here (very long and detailed):
McKinsey Debt and Deleveraging Report (2010) (.pdf)
See shorter text summaries from Gillian Tett of the FT and the Economist.
See also the masterful Rogoff/Reinhart study (which we also refer to), presenting centuries of history on debt and defaults:
This Time is Different: A Panoramic View of Eight Centuries of
Financial Crises (2008/2009)
MGI looked at the facts on the ground and analyzed 45 historic episodes of deleveraging, in which an economy significantly reduced its total debt-to-GDP ratio, that have occurred since 1930. Below is our analysis of their conclusions, heavy on visuals and light on text.
1) US total debt at highest levels since 1929 (before the Great Depression): This reached its highest level in 2008 in the last 110 years, only once before seen in 1929/1930. In that instance, deleveraging took 20 years. (Note: This is a Morgan Stanley slide)
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7) Only 4 ways to get out of the debt mess:
i) belt-tightening,
ii) high inflation,
iii) massive default,
iv) high GDP growth/productivity.
The rich world will have to decide between options 1 and 2, as option 3 has a very high long-term cost and option 4 is illusory (even though I’m a “tech optimist”, even I’m not that optimistic given the debt loads – Silicon Valley, seen from the ground, seems to be in a nasty, secular contraction for innovation/startups despite the health of the big companies like Intel (INTC), Oracle (ORCL), Google (GOOG), etc.). |
