An interesting perspective on (not) deleveraging
11 Jul 2012 by Jim Fickett.
It has been widely noted that some private sector reduction in debt has occurred in the last few years, but that governments have increased their debt. Jamil Baz of Man Group puts the overall debt picture in perspective:
It is sometimes possible to believe that suffering is worthwhile, a way of paying for past sins. In this light, the age of austerity in which we supposedly live has a sort of redemptive quality. …
However, after five years, we are in a worse place than when we started. One would have thought that the recent deleveraging caused debt ratios to collapse. Yet …
Strikingly, in each of Canada, Germany, Greece, France, Ireland, Italy, Japan, Spain, Portugal, the UK and the US, the ratio of total (public and private) debt to gross domestic product is now higher than it was in 2007. …
[We predict that], as deleveraging has not even started yet, the crisis of the world economy has not begun either. All the perceived unpleasantness of the past few years is merely a warm-up act for the greater crisis still to come.
I suspect this is correct. When the private sector has unsustainable debt you get defaults and recessions, or even depressions. But when a government has unsustainable debt you get authoritarian chaos.
Discussion
Note that they site “debt to GDP” is higher, not debt. So, it is possible that deleveraging has occurred in the face of weaker GDP and thus the comment that “deleveraging has not even started yet” is not correct. In fact, it is possible that the deleveraging has caused weaker GDP figures, no ?
What are you talking about Dave. Let's take the US for example. The US govt has been spending about a trillion and a half too much each year. Is that the example of deleveraging you have? That is the opposite of deleveraging.
Weaker GDP implies growth, just weaker growth. It is just that debt (public and private together as mentioned in article) has still grown at a lot faster pace (and unsustainable). Wake up man.
It is true that deleveraging is not good for GDP, but I propose that outright default on unsustainable debt loads, on a worldwide level, is much much worse.