A thousand trillion reasons why the world's central banks are scared of slow growth and deflation

Getty/Ian Forsyth

Japan’s mountain of debt finished 2014 at the 1,029.9 trillion yen (approximately A$11.2 trillion) after adding almost 12 trillion yen to the debt pile over the year.

The good news is that the increase was the lowest since Lehman Brothers collapsed in 2008, according to the Asahi Shimbun. But it has still driven Japanese debt to GDP ratio to more than 225%.

Picture: TradingEconomics.com

What’s interesting is that even though other developed nations have experienced a better growth and inflation profile than Japan over the past two decades, many have also experienced a strong upward trajectory in national debt.

Take France for example:

Japanese debt to GDP Ratio v France (RHS) (TradingEconomics.com)

Or the UK:

Japanese debt to GDP Ratio v UK (RHS) (TradingEconomics.com)

That’s a debt path that has central bankers all over the world terrified as they wrestle with their own moribund economies. It’s why we have had quantitative easing in the UK, US, Japan and now Europe. It’s why rates in most of the developed world are at or close to zero. It’s why the RBA joined the chorus of central bankers in 2015 in cutting rates.

ECB governing council member Peter Praet put it simply last night:

It is important to remember that a too prolonged period of low inflation is not only a cause of demand weakness, but also a symptom of it – as is evidenced in the decline in core measures of inflation. The latter reflects underutilised resources, which if persistent can produce hysteresis, scarring effects on the unemployed and underinvestment. This in turn can permanently lower potential growth, which is also inimical to working through a debt overhang.

This is the situation Greece finds itself in. Even after restricting spending, the slow growth/economic contraction Greece has been experiencing can’t stop the growth of its debt to GDP ratio, now at an unhealthy and unsustainable 175%.

apanese debt to GDP Ratio v Australia (RHS) (TradingEconomics.com)

Commodity bloc countries like Australia, New Zealand and Canada have had much better growth and debt experiences over the past 20 years. They also have a much better starting point in 2015.

But the lesson of Japan, and to a lesser extent Europe, is that the path to a massive debt pile is an easy path to find and a difficult path to get off.

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