Between December 2001 and December 2018 total global debt increased threefold from $59.81Tn to £180.27Tn. That’s equivalent to a rise of over $19Bn per day.
Some economists and commentators refer to these global debt figures as signalling the next financial crisis - a view that is at best simplistic and at worst recklessly misleading. Authors such as these are like Boggarts, small goblin-like creatures of English folklore, which were recently intent on terrifying Harry Potter and his friends by depicting what they most feared. Thankfully, J K Rowling conjured up a Boggart-banishing spell named “riddikulus”, and the response to those that tell us that the threefold rise in debt over the last seventeen years foretells an imminent repeat of the global financial crisis should be similar – “ridiculous”! Here are four reasons why: -
The global economy will not be tripped up by excessive borrowing among the households of the developed Western economies. But there is one country where debt has soared in absolute, and nominal terms - that is China. Chinese debt to GDP skyrocketed from 142% at December 2008 to 254% by December 2018. To put this in context the figure at the end of December 2018 for developed economies was 265%. But China is a middle income emerging economy and the average debt to GDP ratio for all other emerging economies (excluding China) is just 128%. There is scant evidence that Chinese borrowing falls into Irving Fisher’s category of “productive”, which is why the debt servicing ratio for China’s non-government borrowing has risen from 11.8% of disposable income in December 2008 to 19.2% in December 2018. For comparison, the current DSR figures for the US and UK are 14.9% and 15.1% respectively.
Western advanced economies and developed markets will not be tripped-up by current levels of debt. The situation in China is different. The Chinese Communist Party has allowed borrowing to increase precipitously without ensuring that the assets funded by additional debt are productive. We should not be surprised. No command economy has come anywhere close to achieving the productivity, wealth and high standards of living of their democratic, freemarket counterparts, and none ever will – not even China.
Gary Reynolds CFA
Chief Investment Officer
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