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The return of the bad old days of debt
The global debt pile is bigger than ever, says the IMF. It's time to be concerned.
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"We are heading back to the bad old days," says Ed Conway in The Times "and most of the world doesn't seem to have noticed." According to a report last week from the International Monetary Fund (IMF), the global debt pile is bigger than ever. The sum of private and public debt worldwide is $164trn, or 225% of GDP. That's 12% of GDP more than in the late 2000s. "Given what happened [then], it is natural to be concerned," says the Financial Times.
Even more concerning than overall debt levels, however, are the "late-stage, credit-cycle dynamics" and "investor excesses" that are worryingly reminiscent of the peak of the last bubble, according to the IMF. Risky lending has returned with a vengeance in the past few years.
Leveraged loans in the US have doubled since the pre-crisis peak. Within this category, notoriously lenient "cov-lite" loans, with little covenant protection, comprised 75% of new loan issuance in 2017. Equity-market investors have been borrowing to buy stocks in rapidly increasing numbers: margin debt has hit record levels.
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"The awful truth", then, is that we are "just as vulnerable to a financial crisis" as in 2007, says Ambrose Evans-Pritchard in The Daily Telegraph. And "the authorities have fewer safety buffers". With interest rates at rock-bottom levels and state debt already historically high, there is scant scope for much stimulus.
China won't come to the rescue either. It embarked on a government-induced lending spree when exports collapsed in 2009, leaving it with the biggest credit bubble in history. The sum of its household, government and corporate borrowings has ballooned fromunder 150%ofGDP to more than 250%ina decade.
Will the debt pile topple over soon? As Ed Conway points out, recessions typically occur every decade or so, suggesting we are overdue. The US recovery in particular has been unusually protracted at more than 100 months, it is the second-longest on record. If it lasts until the summer of 2019, it will become the longest.
However, the macroeconomic outlook remains benign for now. The world economy expanded by 3.8% last year, the average annual pace in the 2000s, after spending years shaking off a hangover. The US is expected to accelerate, while the eurozone is doing unusually well. Monetary policy remains extremely loose globally, and is only being tightened very slowly in America.
Beware of inflation
But this is where the danger lies. The world is not ready for a sharp rise in borrowing costs in the biggest economy, but thanks to the Trump government's stimulus, which is being injected "at the top of the cycle", investors are beginning to fret about overheating and a jump in inflation. Trump will have been hoping to secure his re-election. But his stimulus may have brought forward the end of the global cycle, says Evans-Pritchard guaranteeing a "frightening crisis" on his watch.
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Alex is an investment writer who has been contributing to MoneyWeek since 2015. He has been the magazine’s markets editor since 2019.
Alex has a passion for demystifying the often arcane world of finance for a general readership. While financial media tends to focus compulsively on the latest trend, the best opportunities can lie forgotten elsewhere.
He is especially interested in European equities – where his fluent French helps him to cover the continent’s largest bourse – and emerging markets, where his experience living in Beijing, and conversational Chinese, prove useful.
Hailing from Leeds, he studied Philosophy, Politics and Economics at the University of Oxford. He also holds a Master of Public Health from the University of Manchester.
