Global non-financial debt stands at $US152 trillion, but this analyst can't see another financial meltdown coming

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There’s a lot of debt in the world right now, the highest level on record.

According to new research from the International Monetary Fund, total non-financial debt — essentially that owed by governments, households and companies — now stands at $US152 trillion, easily surpassing the previous peak seen before the global financial crisis.

That’s $152,000,000,000,000.

And thanks to sluggish economic growth in the period since then, the ratio of non-financial debt to GDP has risen to a giddying 225%, also a record high.

Source: Lombard Street Research

This debt accumulation has got more than a few people worried: if debt is even higher than what it was before the global financial crisis, does that mean the next financial meltdown will make the events seen in 2008 and 2009 pale in comparison?

While some think it will, there are others who are more relaxed about the debt accumulation that’s been seen in the years since.

Dario Perkins, chief European economist at Lombard Street Economics, is one person who isn’t all that perturbed, suggesting that it’s “also important to ask who has being doing the extra borrowing and how these debt securities have been distributed in the financial system”.

“There are good reasons to think that even if something goes wrong, we won’t see a crisis anywhere near as bad as subprime,” he says.

The reason for his optimism is outlined below:

OK, so total global debt has increased since 2008, not good. But as far as the developed economies are concerned, the extra borrowing has come from governments. Nobody seems too worried about a public debt crisis; quite the opposite given current bond yields. The IMF warns that high levels of public debt might damage economic growth and reduce the ability of governments to respond to future recessions. The capacity for fiscal stimulus is reduced. These are perfectly legitimate concerns, but they are not reasons to worry about a financial crisis. Developed market private debt levels have generally declined, thanks to aggressive deleveraging by some of the world’s most indebted consumers.

If there is an area for concern, Perkins believes it emanates from increased indebtedness in emerging market economies, particularly in China, calling it the “bigger threat”.

“China’s private debts have increased rapidly since 2008, thanks to the government’s attempt to replace lost export markets with credit-fuelled investment,” he says.

Source: Lombard Street Research

While some indicators such as credit-to-GDP gap — the percentage that the current ratio exceeds its long term trend — are flashing warning signals over the potential for a financial crisis in China, Perkins believes the “problem is not too large for the authorities to deal with”, at least not yet.

And while some believe what is happening in China today is eerily familiar to what was seen in the US back in 2007, Perkins believes there’s one key difference.

“Yes, China and the US are roughly the same size and yes, there are some obvious similarities between the two — construction booms, overvalued housing, etc. But in the mid-2000s, the entire global financial system was leveraged up on mortgage securities and ABS. When house prices plunged, these securities became illiquid, causing a powerful fire sales-deleveraging loop,” he says.

“In contrast, domestic savings have inflated China’s bubbles.

“If things turn bad, it will be domestic savers who lose, without a wider global panic.”

Perkins says that even if this occurs, something no one can answer with any certainty, he says that “there could be a substantial developed markets hit via trade and investment but it seems manageable”.

“By all means worry about that $US152 trillion debt if you want to. But let’s stop talking about Lehman mark II,” he says.

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