By Ambrose Evans-Pritchard Economics Last updated: August 31st, 2011
Now we know where the tipping point lies. Debt becomes poisonous once it reaches 80pc to 100pcof GDP for governments, 90pc of GDP for companies, and 85pc of GDP for households. From then on, extra debt chokes growth.
Stephen Cecchetti and his team at the Bank for International Settlements havewritten the definitive paper rebutting the pied pipers of ever-escalating credit. "The debt problems facing advanced economies are even worse than we thought."
From the Chicago Tribune 1934,sent to me by a reader
The basic facts are that combined debt in the rich club has risen from 165pc of GDP thirty years ago to 310pc today, led by Japan at 456pc and Portugal at 363pc.
"Debt isrising to points that are above anything we have seen, except during major wars. Public debt ratios are currently on an explosive path in a number of countries. These countries will need to implementdrastic policy changes. Stabilization might not be enough."
Demographic atrophy and aging costs will make this even nastier. "Rising dependency ratios put further downward pressure on trend growth, overand above the negative effects of debt."
Why has it happened?
1) Restrictions on credit have been "systematically removed" since the 1970s. (ie Gordon Brown’s 120pc mortgages and other suchidiocies)
2) Greenspan’s "Great Moderation" fooled us all into thinking the world was free of risk.
3) The "Asian Savings Glut" pulled down real bond yields. (The BIS is being too kind to its masters— central banks — who also pulled down short rates for fifteen years, catastrophically so in my view).
4) Tax policies favour debt; ie corporate debt in Europe, or mortgages in the US, as well as ahost implicit debt subsidies and guarantees (Fannie Mae and Freddie Mac?)
So get rid of all these bad policies (gradually of course).
The professoriat has been a little too cavalier in arguing...