McKinsey debt Feb15A major new report from consultants McKinsey confirms my concerns over the dramatic increase in global debt levels since stimulus policies began in 2008.   As their chart above highlights:

  • Global debt has risen by $57tn to $199tn since 2007, nearly 3x global GDP
  • Government debt is up by $25tn, with three-quarters of this in the developed world
  • Household debt has risen in 4 out of 5 countries, with three-quarters of this in mortgages
  • China’s debt has risen four-fold, with half of the loans linked to property, and the shadow banking system having growth at 36%/year

As McKinsey warn:

Seven years after the bursting of a global credit bubble resulted in the worst financial crisis since the Great Depression, debt continues to grow. In fact, rather than reducing indebtedness, or deleveraging, all major economies today have higher levels of borrowing relative to GDP than they did in 2007. Global debt in these years has grown by $57 trillion, raising the ratio of debt to GDP by 17 percentage points. That poses new risks to financial stability and may undermine global economic growth.

“Government debt is unsustainably high in some countries. Since 2007, government debt has grown by $25 trillion. It will continue to rise in many countries, given current economic fundamentals. Some of this debt, incurred with the encouragement of world leaders to finance bailouts and stimulus programs, stems from the crisis. Debt also rose as a result of the recession and the weak recovery.

“Household debt is reaching new peaks. Only in the core crisis countries—Ireland, Spain, the United Kingdom, and the United States—have households deleveraged. In many others, household debt-to-income ratios have continued to rise. They exceed the peak levels in the crisis countries before 2008 in some cases, including such advanced economies as Australia, Canada, Denmark, Sweden, and the Netherlands, as well as Malaysia, South Korea, and Thailand.

“China’s debt has quadrupled since 2007. Fueled by real estate and shadow banking, China’s total debt has nearly quadrupled, rising to $28tn by mid-2014, from $7tn in 2007. At 282 % of GDP, China’s debt as a share of GDP, while manageable, is larger than that of the United States or Germany. Three developments are potentially worrisome: half of all loans are linked, directly or indirectly, to China’s overheated real-estate market; unregulated shadow banking accounts for nearly half of new lending; and the debt of many local governments is probably unsustainable.”

McKinsey’s very detailed research thus completely confirms the conclusions of my own Research Notes, such as China bank lending: From $1tn to $10tn and back again a year ago.

It also confirms my fears about the fault-lines that have been created by the central banks’ misguided stimulus policies, as set out in the ‘Ring of Fire’ map below.

Ring of fire Feb15

China’s change to its “New Normal” policies under President Xi has already opened the fault-lines in oil markets to the Middle East and Russia, and in mining to Australia, S Africa and Brazil.  At the same time, the fault-line to the Eurozone is waiting to open as the Greek crisis develops, as is the fault-line to London’s over-priced housing market.