Week 28, 2017: Changes in Composition of Global Debt

   

Summary:  This chart shows a positive trend in the growth of global debt, growing from $87 trillion in year 2000 to $199 trillion in 2014. Household debt rose quickly from $18 trillion in 2000 to $33 trillion by 2007, although the pace slowed by 2014 when it totaled $40 trillion, likely a product of the recession. In fact, 80% of countries have increasing household debt and household debt-to-GDP ratios. Similarly, financial debt almost doubled from $20 to $37 trillion between 2000 to 2007, and the rise decelerated by 2014 when it reached $45 trillion. The converse trend is true of both corporate and government debt which have both more than doubled but with a steeper rise in the latter 7 years, from $26 to $56 trillion and from $22 to $58 trillion respectively. This is likely attributable to governmental decisions following the global financial crisis; specifically government bail outs of banks, fiscal stimulus packages and expansionary monetary policy all contributing to rapid growth of government debt.    

What does the chart show? The chart shows changes in the global level of debt from years 2000-2014, measured in trillions of US dollars at 2013 exchange rates. The blue, orange, grey and yellow bars each represent household, financial, government and corporate debt levels respectively, while the point on the graph shows the total debt. 

Total debt-to-GDP ratio includes all forms of debt, however there is variation between countries’ government debt levels. To illustrate; in 2014 Japan had a debt-to-GDP ratio of 400% compared to Argentina’s which was 33%. However, the chart shows that government debt has been increasing vastly as a proportion of total global debt. This is reflected in the fact that in 2007, government debt constituted approximately 1/5 of total global debt compared to 1/3 of total global debt in 2014.

Why is the chart interesting? Two  of the clearest examples of dramatically increased government debt are the US and UK; US national debt increased from 61% to 102% of GDP between 2007 and 2014, while the UK’s national debt in 2007 was at 42% and rose to 88.1% in 2014. Over the last decade, periods of quantitative easing with interest rates persistently low and close to zero has meant easy access to money incentivising corporates to take on debt to fund investment. This in turn led to governments shouldering the burden of not only increased spending on QE but also diminished receipts as a result of increased corporate debt levels. Although this has achieved some of its target in stimulating demand and growth, it has increased current global debt to unsustainable levels.

The IMF reported in 2015 that two-thirds of world global debt comprised private sector debt. They went on to warn against this, with their Director of Fiscal Affairs stating that “excessive private debt is a major headwind against the global recovery and a risk to financial stability… rapid increases in private debt often end up in financial crises [which are] are longer and deeper than normal recessions.”. The report states that, from 2007 up to 2014, ‘no major economies and only five developing economies have reduced the ratio of debt to GDP’. This stands in contrast to the 14 countries that increased their debt-to-GDP ratios of by more than 50%.

Many central bankers may want to scale back the use of QE and raise interest rates to address rising inflation, but they remain wary of the potential negative consequences of poorly timing these measures. In the face of central banks struggling to balance these competing objectives, the IMF calls for governments to instead structurally reform their monetary and fiscal policy to support consumer demand and boost economic efficiency and growth. The IMF advocates targeted debt restructuring and a focus on improving bank balance sheets to minimise the impact of economic deleveraging.