Recently McKinsey & Company issued a report, “Debt and (Not Much) Deleveraging,” that states: “After the 2008 financial crisis … it was widely expected that the world’s economies would deleverage. It has not happened. Instead, debt continues to grow in nearly all countries, in both absolute terms and relative to GDP. This creates fresh risks in some countries and limits growth prospects in many.” The report continues, “Since 2007, global debt has grown by $57 trillion, or 17 percentage points of GDP … In advanced economies, government debt has soared and private-sector deleveraging has been limited.”
The report identifies three primary causes. First is government debt; next is household debt, particularly housing prices in Northern Europe and some Asian countries; and the third cause is the quadrupling of China’s debt within the past seven years, as led by real estate and shadow banking. Some of this debt increase has been desirable, as developing countries account for 75 percent of the corporate and household debt increases. In other words, citizens living in developing countries have seen some economic improvement, allowing households to assume more debt.
However, much of the new debt comes from governments, particularly those of Japan, the United States and most of Europe. Sadly, that trend is expected to continue. I have often written about my frustration for what my generation is leaving our children and grandchildren, namely the largest per-person government debt load ever recorded. With a per-person debt load of over $53,000 in the United States, contrasted to a load 50 years ago of $2,000, how will the next couple of generations ever pay it off?
I suppose we can take some solace in knowing that there are countries much worse off than the United States. Japan’s debt-to-GDP ratio is 400 percent. Ireland is at 390 percent. Spain has a 313 percent ratio. The United Kingdom’s is 252 percent, while the United States is at 233 percent. These debt ratios do not include unfunded liabilities, such as Social Security promises. But there are also countries in much better shape regarding this important measurement. China is at 217 percent and, per the quadrupling of its debt as mentioned above, is increasing rapidly. Mexico is at a scant 73 percent, and the lowest is Argentina at 33 percent. Some of the countries at the lower levels suffer from many other problems: Debt just doesn’t happen to be one of them.
Specifically to the United States, there is some hope. That hope comes from our energy independence due, in large part, to the advances that allow for inexpensive fracking operations. We also enjoy the most efficient and effective agricultural system that allows for inexpensive food, we have access to sizable fresh water resources, and our government is stable and supports a currency that is the de facto worldwide financial exchange. We have much to be thankful for, yet we still have issues to address, such as high poverty levels and the continually growing gap between those who are financially resourced and those who barely subsist.
I would highly recommend that reading through this excellent report would be time well spent. Both the full report and an executive summary are available at the McKinsey & Company website.
– S. Joe DeHaven