When someone can't re-pay debt, the burden inevitably falls onto others. The same is true for global debt, and the effects are potentially catastrophic.
It’s more money than anyone would know what to do with: US$199 trillion is what the world’s people owe each other, according to the McKinsey Global Institute’s estimate of global gross indebtedness.Debt has increased by about 6 per cent a year since the turn of the century, according to the McKinsey Global Institute, and it’s also increasing relative to the size of the world economy. On McKinsey’s numbers, total debt – what’s owed by people, corporations and governments – is 286 per cent of global production.
The right amount of debt can help drive economic growth by sending money where it’s needed most. But the global financial crisis (GFC) of 2008 and the Greek crisis that followed it remind us of an old and simple rule: too much debt can batter economies quickly when the wrong people are unable to repay it.
“Policy-makers will need to consider more ways to reduce government debt, and it may be time to re-evaluate how incentives in the tax system encourage the amassing of debt." McKinsey Global Institute on fixing debt
McKinsey’s figures confirm that in general, the GFC made lenders cautious. Finance businesses’ debt has risen little if at all since 2007 outside China and a few pockets of Europe. US finance sector debt has dropped by almost a quarter.
More on the McKinsey report, Debt and (Not Much) Deleveraging
Elsewhere, though, the GFC only slightly dented people’s enthusiasm to borrow. And governments have borrowed more money than anyone else – perhaps because they are mostly still trusted to pay it back.
“For six of the most highly indebted countries,” reports McKinsey, “starting the process of deleveraging would require implausibly large increases in real GDP growth or extremely deep fiscal adjustments.”
In China and Singapore, corporations have been borrowing, often for property investment. In Canada, Australia, Malaysia and parts of northern Europe, household debt has climbed above its pre-GFC peaks.
The good news: the world’s net indebtedness was once again zero. For every dollar owed, there’s someone expecting to receive it. The trick, as always, is to make sure those expectations come true.
This article is from the May 2015 issue of INTHEBLACK magazine