The world is falling deeper into debt and faces the ugly prospect of either continued slow economic growth or another financial crisis, a new report written by former central bankers warns.
The Geneva Report on the World Economy published Monday notes that, contrary to popular belief, the world is becoming more indebted in the wake of the debt-fueled 2008 financial crisis, not less.
Rising debt and slowing global growth, the report warns, are a “poisonous combination” and a “source of concern for debt sustainability as well as for any prospect of sustained global recovery.”
Published by the Centre for Economic Policy Research, a United Kingdom-based think tank comprising academics from all over Europe, the report has three authors who were economists for central banks, including Vincent Reinhart, the chief economist for Morgan Stanley who also worked for the Federal Reserve.
Since the 2008 financial crisis, the authors note, total world debt has increased by nearly 40 percent, including both public and private, despite the widespread perception that governments, businesses and individuals have tried to improve their balance sheets. The ratio of global debt to global economic output is at a record-high 212 percent, they estimate.
That presents a problem for politicians and policymakers who would like to lower the risk that governments or the financial sector become over-extended but also want to boost economic growth by expanding credit and consumer spending.
“The path for successful deleveraging policy looks quite narrow,” the authors write, adding that “indeed, there is a high likelihood of either a prolonged period of very low growth or even another global crisis.”
The risk of some kind of a crisis is particularly acute in China, the report warns, which enjoyed strong export-driven growth before the crisis but now has become overly reliant on credit-driven domestic spending.
The report comes as the Federal Reserve is determining the timing of its plans to raise short-term interest rates above zero for the first time since the crisis and begin tightening credit and monetary conditions. The authors call for “caution” in raising rates to avoid tightening too early and harming the already weak recovery, but also say that “vigilance is required” in monitoring stocks, bonds and housing prices for signs of a dangerous bubble.
As for the government’s plans for taxing and spending, the economists say that more stimulus might have been appropriate in the early stages of the crisis, but the focus now should be on trimming debt and overhauling the United States’ tax code and entitlements.
