Yesterday, the IMF warned in its latest fiscal monitor report of economic stagnation as global debt has hit a record USD152tn, a staggering 225% of world GDP; with private sector borrowing accountable for two-thirds (USD100tn) of the total. The organisation went on to highlight its concerns that non-financial corporations’ debt and private debt is rising rapidly; ‘when private debt is on an unsustainable path it is important to intervene early on in the process t make sure financial crises and recessions can be prevented.’
In terms of rapidly increasing private debt, the IMF has singled out Australia, highlighting its increasing concerns over the country’s household debt. As regular readers know, Stratton Street’s Net Foreign Asset (NFA) calculations consider not only government debt but also corporate, and importantly, household liabilities. As such, Australia is not included in our investable universe as the country is assigned a 2 star rating; as NFL are greater than 50% of GDP.
Previously when high debt levels were of concern, world output and inflation were relatively strong, allowing debt to GDP ratios room to decline. Currently however we are faced with painfully slow global growth and benign inflation making these high debt levels, especially within the private sector appear even more concerning and unsustainable.
Central banks have been bearing the brunt of sustaining growth by keeping interest rates at record lows; with the Fed, ECB and BoJ fast running out of options. As such these low interest rates, which do not appear to be budging anytime soon, have encouraged increased borrowing. We have discussed the need for governments to combine fiscal policy (e.g. tax incentives and government-led debt restructuring programmes) along with the current easy monetary policy to boost growth. Yes short-term government borrowing will increase in the short-run, however this option appears more attractive than what US economist Irving Fisher defines as the debt-deflation spiral.