Innovation/Global Risk 

 

The World Is Still Drowning in Debt!

 

By Shlomo Maital  

 

    The good news? America is halfway through its deleveraging (debt reduction) process.  The bad news?  The rest of the world is still piling up debt and hasn’t even begun.

  A report in McKinsey Quarterly by three McKinsey scholars * provides a useful summary regarding where the world stands in its deleveraging process.  This is crucial, because until households and businesses feel comfortable with the existing level of debt, they are unlikely to resume their spending and investment and economic growth and job creation are unlikely to resume.  Here are the results:   

 

  •          Although the debt ratio of US households remains high, they may be halfway through the deleveraging process.
  •        In the United States, household deleveraging may have only a few more years to go, while in Spain and the United Kingdom it has just begun.
  •         … up to 14 percent of UK mortgages could be in difficulty—identical to the percentage of US mortgages in difficulty today.
  •        Significant public-sector deleveraging typically occurs after GDP growth rebounds.  (The World Bank says developed country GDP growth this year will be very weak, only 1.4 per cent). 
  •        The deleveraging process that began in 2008 is proving to be long and painful.   The unwinding of debt—or deleveraging—has barely begun. Since 2008, debt ratios have grown rapidly in France, Japan, and Spain and have edged downward only in Australia, South Korea, and the United States. Overall, the ratio of debt to GDP has grown in the world’s ten largest economies.      

 

Fasten your seat belts.  More lean years are ahead, as the massive amount of debt continues to grow in most countries.

 

 

 

 * Working out of debt . McKinsey Quarterly, JANUARY 2012 . Karen Croxson, Susan Lund, and Charles Roxburgh .