The Financial Times is one those papers that speaks the plain truth to the bosses. This is from their July 15 edition headed “We should be worried about debt as well as inflation“:
A recent report from JPMorgan, which crunches statistics from The Institute of International Finance, starkly details the issue. It notes that total global debt was 352 per cent of gross domestic product in the first quarter of this year, with private sector debt accounting for two-thirds of this, and public sector debt one-third.
Moreover, the pandemic-era increase was broad-based and came after a large jump in debt during the 2008 global financial crisis — and the former was considerably bigger than the latter. Thus, total global debt today, relative to GDP, is more than double its 2006 level — and triple the 2000 ratio (when it was under 100 per cent).
But the really fascinating question is the bigger one: can a thrice-leveraged system ever really deleverage, without suffering a full-blown crisis (that is, mass default)? After all, growth is unlikely to provide an exit route. And while inflation is “a potential route for reducing debt relative to GDP”, as the JPMorgan report notes, that only works if inflation “is unanticipated and does not drive up interest rates”. Therein lies the challenge for central bankers — and the huge philosophical question hanging over our 21st-century global economic system.