Debt worldwide has grown to unprecedentedly high levels and has to be brought down to prevent another financial crisis.
This was highlighted by the Inter¬national Monetary Fund at its annual meeting in Washington recently.
Other problems facing the global economy include the stagnation in world trade, a decline in commodity prices and the reversal of capital flows to developing countries.
A recently released United Nations report has analysed the situation as a third phase in the global crisis that began with the United States in 2008, then spread in a second wave to Europe, and is now moving on to the developing countries.
The IMF said that world debt had reached US$152tril, a record level. It was 200% of the value of global gross domestic product in 2002, but has risen to 225% in 2015. The private sector holds two thirds of the total, but government debt has also risen fast, and the IMF warned about the risk of another financial crisis.
“Excessive private debt is a major headwind against global recovery and a risk to financial stability,” said Vitor Gaspar, IMF director of fiscal affairs. “Rapid increases in private debt often end up in financial crises.”
Most of this global debt is concentrated in developed countries. The huge jump there has been due to policies of easy money and low, zero or even negative interest rates, and especially to quantitative easing in which Central Banks bought bonds and pumped trillions of dollars into the banking system.
It was hoped that this massive infusion would cause the banks to increase lending to consumers and businesses and thus stimulate economic growth.
However, the real economy did not benefit much. Instead, most of the money went into the equity markets, boosting prices, and to the developing economies as investors searched for higher yield, and this helped to fuel the growth of their debt.
The debt of non-financial corporations in emerging economies jumped from US$9tril at end-2008 to over US$25tril by end-2015, or from 57% to 104% of their GDP.
Foreigners now own unprecedentedly high shares of bonds and equities in developing countries, which have become vulnerable to investor-mood swings and funds, resulting in financial crises. When market sentiment or conditions change, the massive inflows can turn into equally large outflows. Indeed, the boom-bust cycle of capital flows has gone through many turns through the years. Huge amounts left developing countries in the fourth quarter of 2015, and for that year as a whole there was a net outflow of US$656bil or 2.7% of their Gross Domestic Product, according to the UN Conference on Trade and Development (UNCTAD).
This was a big change from a net inflow of 1.3% of GDP in 2013. This turnaround of 4.4% is much larger than the reversals of capital flows in 1981-83, 1996-98 and 2007-08.
– Third World Network Features.