Friday, February 6, 2015

World Addicted to Debt (McKinsey Report)

I was rummaging through my usual several articles to begin the day and I came across a particularly interesting article in the Economist that talked about a McKinsey report on the debt binge that the world has undertaken in the past and in the recent years. Unfortunately, the trend has accelerated at a trajectory that has been quite frightening to those have followed this. Personally, I have followed this ever since I started following the financial markets and the finances of certain countries such as the United States and China. Both countries have had significant problems with the debt, especially when it came to bad debt that had accumulated from the wrongful policy decisions that led to further market turmoil. The most troubling aspect of this debt addiction is the amount of advanced economies that have extreme turmoil in the last decade or so, with some countries more addicted to debt that ever. What's interesting about the article is that some countries have debts that are at extremely dangerous levels, which are at or above 300% of GDP. In this blog post, I will focus on two other situations about debt, but isolated to two of the largest economies in the world in the United States and in China.

In a connected Guardian article about debt, global debt has grown tremendously ever since the financial crisis especially in China. What's interesting about the fact of this tremendous growth in debt is that China has been one, if not the main driver of global economic growth ever since the financial crisis. The chart in the Guardian article gives us several amazing representations of how China's debt has grown since 2000, with the country's total debt quadrupling in the space of 7 years between 2007 and 2014 alone. China's total debt to GDP ratio has reached the levels witnessed in the advanced industrialized economies of the United States, Japan and Western Europe. This curious rise in debt has been especially troubling as the Chinese economy has become an important cornerstone in the world economy.

According to the data gathered by the McKinsey Global Institute, most countries have been leveraging their debt, while the growth rates for many of these countries have not matched the outstanding growth that a country like China has witnessed in the last 35 years. From the new data on debt that McKinsey has out, we can surmise that there is a significant amount of countries that have racked up enormous debts, such as China, but many of these countries cannot utilize these particular instruments to boost growth to Chinese levels via either government stimulated or central bank stimulated growth. What we're seeing here is that with the economic engine of growth that China has been for the world economy in the last 35 years is stalling at the present moment, due to the style of economic growth that China has been pursuing. For this long and sustained period of time, the export engine that is China has been working overtime to ensure that the world economy, which was led by the advanced economies of the United States, Japan and Western Europe, has been running smoothly. With this new piece of information about the Chinese manufacturing Purchasing Manager's Index (PMI) and the continued industrial slowdown that has dented world confidence in China's growth potentials, we are right to be worried about the future growth trajectories of the Chinese economy and the world economy.

Like China and various other economies, the debt in the United States has reached similar troubling levels as total debt has reached close to the 300% threshold, with the debt to GDP ratio at around 269%. While this number is reputed as tremendously higher than perhaps a more ideal debt to GDP ratio, the growth in the debt in the United States is slowing compared to various countries like China, where debt has grown more rapidly. This signals an improvement over the debt battles that have raged within the country's intellectual realms, but there needs to be work done on this to combat the unsustainable growth in the country's government debt.

From the McKinsey report, we can easily picture that the sustainable growth in debt is an extremely worrying trend for the world as a whole, especially in countries like in China, where the growth in debt risks putting the world's largest economy by PPP terms in grave danger. I believe that reports like this particular McKinsey report reveal a world that is needing a new path towards a new economic consensus on growth that is not entirely based on debt and on deficit financing.

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