McKinsey & Company did us quite a solid with their recent report titled "Debt and (Not Much) Deleveraging" (yes, I'm attempting to be hip...and prove to my high school age son and daughter I'm not as big a nerd as they think). Anyway, I’d encourage economic junkies to at least read the executive summary. http://www.mckinsey.com/insights/economic_studies/debt_and_not_much_deleveraging
To put things in perspective, let’s start with global debt vs. global GDP (gross domestic product). As shown in the below chart, debt continues growing faster than economic underlying growth (and the capability to repay or service said debt).
- Government debt (below) grew in both periods but, not surprisingly, ramped up after 2008 (both in total and as a percentage).
- Corporate debt grew evenly in percentage terms over both periods (below).
- But household and financial sources pace of debt growth slowed dramatically both as a percentage and in dollar terms from the earlier to the latter periods (charts below).
- $25 trillion in global government debt was driven by a hike of $19 trillion in advanced economy government debt.
- $18 trillion in global corporate debt was taken on in massive bond sales and loans taking advantage of record low yields and rolling (refinancing) existing debt to ever lower rates.
- $7 trillion in global household debt may have (net-net) been entirely due to China’s housing bubble creation of over $21 trillion in new Chinese debt…roughly half of which was attributable housing. The US, UK / Ireland, Spain and select other recent real estate boom / bust patients saw declining mortgage debt creation and consumer deleveraging.
- $8 trillion in global finance
- China's housing driven bubble and mortgage debt binge looks to be rapidly losing steam.
- Advanced economy consumers do not appear interested or capable of increasing their household debt further.
- Advanced economy governments are in deep debt and running into declining rates of debt creation (US down to mere half trillion annual deficits rather than nearly $2 trillion in '09, '10…likewise slowing debt creation in most EU nations).
- And what if corporations sense rates can go no ZIRP'ier or NIRP'ier and cut down new bond issuance or debt creation (hasn’t happened yet…but watch out if this last source of debt rolls over).
- The rest of the world’s governments sensing softening of demand may stimulate and/or may pull in their horns...but either way it won't be enough.