While many investors recently have focused on the dangers posed by ballooning corporate debt, the problem is much bigger. The debt owed by governments, businesses, and households globally has surged by nearly 50% since the years before the 2008 financial crisis, reaching $246.6 trillion as of the beginning of March 2019, according to calculations by the Institute of International Finance, an association of global financial firms, as reported by The Wall Street Journal.
“Globally, you are at worryingly high levels,” as Sonja Gibbs, managing director for global policy initiatives at the IIF, told the Journal. “There’s going to be an impact on the broader economy,” she indicated.
“The world is in a delicate equilibrium,” warned Mark Carney, governor of the Bank of England, during a speech in Feb. 2019, as quoted by the Journal. “The sustainability of debt burdens depends on interest rates remaining low and global trade remaining open,” he added.
Significance for Investors
U.S. Treasury bonds are risker than stocks, Barron's observes. For example, the 30-year Treasury, now yields about 2%, near its recent record low, and its price would plummet by 20% if the yield increased to 3%.
In July 2019, U.S. consumer borrowing swelled by $23.3 billion from the prior month, more than any economist polled by Bloomberg had expected. Revolving debt outstanding, which includes credit card balances, increased by $10 billion. Both increases were the biggest since Nov. 2017, Bloomberg notes. Non-revolving debt, among which auto loans and student loans are counted, was up by $13.3 billion.
Once households reach a point where they feel overextended on debt, this may spark a contraction in consumer spending, which accounts for about 68% of U.S. GDP. As long as the job market remains strong, and wages keep rising, that day of reckoning may be postponed.
Examples of worrying trends outside the U.S. include 10 consecutive quarters of net borrowing by households in the U.K. through March, or spending in excess of income, and consumer debt that is double consumer income in Australia, the Journal reports. Starting in 2017, the Bank of Canada moved its benchmark interest rate up to 1.75% in five increments. While this was far below the 4.25% rate in effect before the financial crisis, the downward impact on economic growth was “sharper and more broad-based than we expected,” as Lynn Patterson, a former deputy governor of the Bank of Canada, observed in a March 2019 speech, as quoted by the Journal.
Meanwhile, negative interest rates, which are prevalent in the eurozone and Japan as the result of central bank policy, threaten the financial and economic systems, a column in Bloomberg warns. Rather than receiving income, savers, investors, and lenders end up paying borrowers to take funds off their hands. When pricing assets or projects, a negative or zero interest rate effectively sends their value to infinity.
"We already have a devastating interest rate situation today, the end of which is unforeseeable,” as Peter Schneider, the president of a local savings bank association in Germany, warned recently, as quoted in the column. By contrast, per the same column, former Federal Reserve Chair Alan Greenspan recently said that negative yields on U.S. bonds would not surprise him, and that this would not be “that big of a deal.”