Monday, October 31, 2011

Debt Continues to Haunt Global Economies

Even though there's snow on the ground, and many homes in New England are without power, it's Halloween.

It seems appropriate, then, to on the "debt ghosts" coming back to haunt us in the economy.

If the specter of this past weekend's storm wasn't enough to haunt you (we just got power back this morning), consider this discussion of the global debt burden that arose at a recent conference sponsored by the Economist magazine (I have added areas of emphasis):

Typically, however, the other striking speech came from Kyle Bass, the investor, which illustrated the other side of the problem. He pointed out that total global credit rose from $80 trillion in 2000 to $210 trillion today. In many nations, debt is three to four times GDP. These figures have normally been seen only in the course of major wars (i.e 1914-1918 and 1939-1945) when the result was a complete wipeout for creditors of the losing states.

Mr. Bass's figures include the so-called shadow banking system, which are entities that exist outside the normal banking channels (e.g., money market funds) that also provide credit.

These debt figures are obviously staggering. Now, to be sure, some would argue that they could be overstated, since much of what is considered "debt" are actually credit derivatives that probably will not be exercised.

But still: $130 trillion in a decade?

The Financial Times also picked up on some of the figures that Mr. Bass discussed, noting (again, I have added emphasis):

A study by the Financial Stability Board of the 11 largest economies with significant shadow banking found the sector, which previously peaked at $50,000 bn in 2007, dropped to $47,000 bn in 2008, but is now back up to $51,000 bn. It now constitutes more than a quarter of the financial system and is about half the size of traditional banks....

Regulators fear {non-bank credit} remains a big threat to long-term stability, particularly as more activities move out of the bank sector to escape tighter regulation there.

In short, while we continue to talk about paying off past debts and getting our global economy on a sound footing, the numbers would suggest that in fact we're heading in the opposite direction.

One final thought: Imagine if the shadow banking system was subject to the same capital rules as the banks? It might make the system more stable in the long run, but the shorter term consequences would be very negative.