A World Overflowing with Debt
February 6, 2015 5:31 AM   Subscribe

Step Aside from US Centric. Eurocentric and Step into Global Debt. 2007 revisited That's the warning today from McKinsey & Co.'s research division which estimates that since 2007, the IOUs of governments, companies, households and financial firms in 47 countries has grown by $57 trillion to $199 trillion, a rise equivalent to 17 percentage points of gross domestic product. While not as big a gain as the 23 point surge in debt witnessed in the seven years before the financial crisis, the new data make a mockery of the hope that the turmoil and subsequent global recession would put the globe on a more sustainable path. This is not new but it is troublesome--particularly the concern that neither austerity nor growth will solve this.
posted by rmhsinc (24 comments total) 12 users marked this as a favorite
 
Be nice if they linked to the actual report, instead of summarizing conclusions in barely 3 paragraphs. Is this an executive summary for the barely literate?

Look at chart #2, public vs private debt. Private debt as a % of GDP has dropped since 2007. Debt's easy and later consequences rarely affect elected officials. Broken political systems and screwed up incentives are at least part of the problem.

Curtail government borrowing or, god forbid, raise taxes.
posted by leotrotsky at 5:51 AM on February 6, 2015 [2 favorites]


McKinsey (and you) are failing to distinguish between government and private debt, and currency issuers versus users.
posted by parmanparman at 5:55 AM on February 6, 2015 [2 favorites]


It seems very silly to frame it this way, as if it was meaningful to talk about global debt in the same way you talk about individual debt, and as if this was not basically the intended consequence of the policies of the past few decades. There are no lenders external to the earth, so the nature of debt when looked at from this scale changes. Instead of a liability of the system, it instead represents a flow of wealth (in the form of interest) within the system. Generally a flow of wealth towards the rich.

Imagine a financial system with four actors: two average individuals, one rich individual, and a government. A bridge needs to be built. If the government taxes all the the individuals to build the bridge, taxes will be high. So instead they borrow the money from the rich individual. This allows taxes to stay lower and for the burden to be paid off over time. But it also does something else: It sets up a flow of wealth from the "poorer" individuals to the wealthier one. As wealth becomes more concentrated, this becomes even more attractive, reinforcing the cycle. And then you end up with 20 people having as much wealth as 3 billion.
posted by Nothing at 6:02 AM on February 6, 2015 [23 favorites]


But the government in your scenario is, in real life, not some ex nihilo "actor," but an institution set up by the rich person to facilitate that very flow of wealth towards himself.
posted by Steely-eyed Missile Man at 6:14 AM on February 6, 2015 [8 favorites]


leotrotsky--for you supplemental reading--a link to the 136 page report. I think the link to the full pdf is at the bottom of the page
posted by rmhsinc at 6:17 AM on February 6, 2015 [1 favorite]


I'm not that impressed by what they are showing. They make a graph more scary by showing the absolute numbers have grown, mention they did fix the information for 2013 exchange rates, but they did not mention constant dollars. So going up by 57 trillion in 7 years would be when the dollar's inflation rate has been 14%. But this doesn't take into account a worldwide inflation rate.

Okay, these figures do get normalized somewhat in the percent of GDP change which they point out has increased by 17%. Except this is 17 actual points, not relative to 2007. Relative to 2007, it would work out to be 286/269 or a 6% increase. 6% over 7 years. You can argue that's not the right direction, but it is not earth-shaking.

Finally, if you are actually investing in growth, you will have debt.
posted by dances_with_sneetches at 6:18 AM on February 6, 2015 [2 favorites]


Glad some of you are not worried or see this as a problematic analysis. from the NYT--a readable analysis of the report for people like me:
posted by rmhsinc at 6:26 AM on February 6, 2015


I didn't claim it wasn't problematic, I said it was the expected outcome of a system that has been manipulated to facilitate wealth transfer to the rich. I do think that framing it like a problem of overspending both obscures the real source of the problem, as well as shifts blame onto those who are actually the victims of this system.
posted by Nothing at 7:01 AM on February 6, 2015 [7 favorites]


I am not an economist. I came to this from a perspective of knowing how to read a graph and I am sensitive to how people try to skew data to make their point. A valid point doesn't need skewed data.
posted by dances_with_sneetches at 7:19 AM on February 6, 2015


Another issue, as raised repeatedly by Paul Krugman: what's wrong with lots of debt when money is practically free? Of course it's better to use one's borrowings for investment rather than consumption, but regardless, total indebtedness without addressing actual interest rates is not a complete analysis.
posted by twsf at 7:26 AM on February 6, 2015 [2 favorites]


McKinsey.

Fuck em.
posted by MartinWisse at 7:35 AM on February 6, 2015 [3 favorites]


This is pure propaganda put out to make sure There Is No Alternative to catastrophe capitalism.
posted by MartinWisse at 7:36 AM on February 6, 2015 [3 favorites]


I am certainly not an economist, nor particularly well versed in macroeconomics. As the article states--there is nothing intrinsically wrong with debt--however--as debt increases so does volatility and the probability of default or bankruptcy. It is usually easier to satisfy and discharge a small debt rather than a large debt ( monthly utility bill versus the balance on mortgage). This what we saw in 2007 and I hate to see that kind of abrupt default in another 2-3 years. As far as borrowing--if one is going to borrow, which is certainly a legitimate personal, corporate or government strategy you are going to borrow from some one/thing that has money--the more you borrow the more you become indebted to the "wealthy" ( whether bank/corporation/government) and the richer they become. Raising taxes is certainly an option ( certainly in the US ) but a bit more difficult option in other parts of the world-including Europe where taxes are already quite high. Also--there is always the real and threatened fear of moving capital to less costly labor markets. I just do not see it as a simple problem.
martinwisse--I regret this is upsetting to you--but "fuck em" and "propoganda" does not help me better understand realistic alternatives--and believe me--I am open to them.
posted by rmhsinc at 7:46 AM on February 6, 2015


Time is a flat circle
posted by Damienmce at 7:52 AM on February 6, 2015


The last time I checked, there are two parties involved in the debt transaction. If debt is so bad, maybe lenders ought to consider not lending so much.
posted by tonycpsu at 8:01 AM on February 6, 2015 [1 favorite]


If debt is so bad, maybe lenders ought to consider not lending so much. That is exactly what happened after the bust in 2007-->serious cash flow problems for businesses, inability to refinance etc. Might be an excellent idea to not lend so much during stable and good times but this will most dramatically effect the marginal borrower--poor, college students, small business, developing countries etc. I certainly have no realistic or politically palatable solution but severe austerity is the natural consequence of the high level of borrowing. And stimulating the economy is not all that easy--Greece is a good example of this dilemma. Who is going to provide the economic stimulus that appears to be badly needed in Greece--tempting to say the EU who "lent" them into this situation. Maybe a bit of relief but I personally do not see it.
posted by rmhsinc at 8:19 AM on February 6, 2015


My point was that the scorn seems to be heaped on the people who are borrowing and not those who are lending, not that people don't need access to credit.
posted by tonycpsu at 8:24 AM on February 6, 2015


Debt is people, my friends
posted by thelonius at 8:37 AM on February 6, 2015


Sounds like a good time for a Jubilee!
posted by notyou at 10:33 AM on February 6, 2015 [2 favorites]


Krugman: Nobody understands debt

St. Louis Fed: "...the recent large deficits change almost nothing about the long-term fiscal prospects of the United States. The overwhelming obstacle to a sustainable fiscal path for the United States, regardless of the size of the current debt, remains health-care spending."

"As the sole manufacturer of dollars, whose debt is denominated in dollars, the U.S. government can never become insolvent, i.e., unable to pay its bills. In this sense, the government is not dependent on credit markets to remain operational. Moreover, there will always be a market for U.S. government debt at home because the U.S. government has the only means of creating risk-free dollar-denominated assets (by virtue of never facing insolvency and paying interest rates over the inflation rate, e.g., TIPS—Treasury Inflation-Protected Securities)."
posted by triggerfinger at 10:43 AM on February 6, 2015 [2 favorites]


Ancient societies employed Jubilee to correct these issues. We later adopted bankruptcy, squatters' rights, etc. as piecemeal fixes, but later limited even though.

In truth, we need jubilee-like ceilings on an investment, debts, etc. long term worth because without that investors seek to create "slavery light" scenarios, and fail at due diligence for even reasonable investments.
posted by jeffburdges at 10:45 AM on February 6, 2015




Mountains of Debt--Good Article but I would point out the closing paragraph:This argument does not deny that the actual composition and ownership of assets and liabilities matters (even if by definition they always have to match). We know well that certain credit booms are indeed associated with crisis so worrying about debt is a good idea. That's all I saying--I am worried about it because the very people that concern us ( The .01% and major lenders) will end of the beneficiaries of most crises.
posted by rmhsinc at 12:43 PM on February 6, 2015


And now Krugman weighs in directly on the McKinsey report: http://www.nytimes.com/2015/02/09/opinion/paul-krugman-nobody-understands-debt.html.
posted by twsf at 10:55 AM on February 9, 2015


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