December 3, 2023

New York (Project Syndicatee)—The world economy is heading for an unprecedented confluence of economic, financial and debt crises, following an explosion of deficits, borrowings and leverage in recent decades.

In the private sector, the mountain of debt includes households (such as mortgages, credit cards, auto loans, student loans, personal loans), businesses and corporations (bank loans, bond loans, and private loans), and the financial sector. (liabilities to bank and non-bank institutions).

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In the public sector, this includes central, provincial and local government bonds and other formal liabilities, as well as underlying debt such as unfunded liabilities from pay-as-you-go pension plans and health care systems—all of which will continue to age societies. To grow as.

staggering debt load

Looking only at explicit loans, the figures are staggering. globally, total private- and public-sector debt As a share of GDP, growth from 200% in 1999 to 350% in 2021. This ratio is now 420% in advanced economies and 330% in China.

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In the United States, it is 420%, which is higher than during the Great Depression and since World War II.

Certainly, debt can spur economic activity if borrowers invest in new capital (machinery, housing, public infrastructure) that yields a return greater than the cost of borrowing. But borrowing too much to finance consumption spending in excess of a person’s income on an ongoing basis is a recipe for bankruptcy.

Furthermore, investing in “capital” can also be risky, whether the borrower is a home buyer buying a home at an artificially inflated price, a corporation seeking to expand too quickly without regard for returns, or a government. Which is spending money on “white elephants” (extravagant but wasteful infrastructure projects).

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borrow more

Such excessive borrowing has been going on for decades for various reasons. The democratization of finance has allowed income-strapped households to finance consumption with debt. Center-right governments have consistently cut taxes without cutting spending, while center-left governments have spent generously on social programs that are not fully funded with substantially higher taxes.

and tax policies that favor debt over equity, fueled by excessively loose monetary and credit policies of central banks, led to increased borrowing in both the private and public sectors.

Years of quantitative easing (QE) and credit easing kept borrowing costs close to zero TMUBMUSD10Y,
and in some cases even negative (as in Europe And Japan until recently). As of 2020, the negative-yielding dollar-equivalent public debt was $17 trillionand in some Nordic countries, even the mortgage There was a negative nominal interest rate.

bankrupt corpse

The explosion of unsustainable debt ratios implied that many borrowers—households, corporations, banks, shadow banks, governments, and even entire countries—were bankrupt “zombies” who were forced to accept low interest rates (which increased their debt-service costs). managed). ,

During both the global financial crisis of 2008 and the COVID-19 crisis, many insolvent agents were saved by zero- or negative-interest-rate policies, QE, and outright fiscal bailouts.

But now, inflation fed by the same ultraloose fiscal, monetary and credit policies has put an end to this financial Dawn of the Dead. forced with central banks increase in interest rates
In an effort to restore price stability, zombies are experiencing a sharp increase in their debt-servicing costs.

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For many, this represents a triple whammy, as inflation is also reducing real household income and reducing the value of household assets, such as homes and stocks.
The same is true for fragile and highly leveraged corporations, financial institutions, and governments: they face rapidly rising borrowing costs, falling income and revenues, and Disclaimer property value all at the same time.

worst of both worlds

Worse, they are coinciding with development return of stagflation (High inflation with weak growth). The last time advanced economies experienced such conditions was in the 1970s. But at least then, debt ratio There were very few. Today, we are facing the worst aspects of the global financial crisis as well as the worst aspects of the 1970s (stagflationary shocks). And this time, we cannot cut interest rates just to spur demand.

After all, the global economy is increasingly battered by short- and medium-term negative supply shocks that are pulling down growth and raising prices and production costs.

These include pandemic disruptions to the supply of labor and goods; Impact of Russia’s War in Ukraine on Commodity Prices; China’s increasingly destructive zero-covid policy; and a dozens of other medium-term shocks– from climate change to geopolitical developments – which will create additional persistent inflationary pressures.

Unlike the financial crisis of 2008 and the initial months of COVID-19, giving relief to private and public agents with loose macro policies will add more petrol to the inflationary fire. This means that a hard landing—a deep, protracted recession—on top of a severe financial crisis will occur. As asset bubbles burst, debt-service ratios rise, and inflation-adjusted income falls among households, corporations, and governments, economic crises and financial crashes feed off each other.

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To be sure, advanced economies that borrow in their own currency can use unexpected inflation to reduce the real value of some nominal long-term fixed-rate debt. With governments reluctant to raise taxes or cut spending to reduce their deficits, monetization of central bank deficits will once again be seen as the path of least resistance.

But you can’t fool all the people all the time. Once the inflation genie is out of the bottle – which will happen if central banks give up the fight in the face of economic and financial crisis – nominal and real borrowing costs will increase. The mother of all stagflationary debt crises can be avoided, not avoided.

Nouriel Roubini, emeritus professor of economics at New York University’s Stern School of Business, is the author of “Megathreats: Ten Dangerous Trends That Imperil Our Future, and How to Survive Them” (Little, Brown & Company, 2022).

This comment was published with permission Project Syndicate , inevitable crash

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