The above title is the title of the latest note from SocGen’s Kit Juckes, who riffs on a chart found in the latest IMF World Economic Outlook.
I settled down with IMF’s World Economic Outlook and have chosen two charts from it. The first shows public sector debt in advanced economies as a percentage of GDP, still rising sharply and now homing in on the historical mid 1940s peak. The expression ‘debt super- cycle’ was coined by the Bank Credit Analyst back in the 1970s. I thought that 2008 would bring this super-cycle to an end but it has been kept alive by switching ballooning private sector debt for even faster public sector debt growth. The quid pro quo is deteriorating sovereign credit quality in advanced economies, as well as negative real rates and central bank bond-buying. It’s a recipe for a secular bull market for EM currencies that is interrupted by sporadic fears of return to recession.
Photo: SocGen, IMF
One interesting counterpoint to this is that despite skyrocketing levels of government debt, this is being counteracted by private sector deleveraging.
It was calculated yesterday that at least in the US, total debt-to-GDP (including Federal, state & local, and household debt) had actually fallen to a 6-year low. Government debt is the safest kind of debt (because a central bank can most easily back stop it) and replacing private sector debt with public sector debt may be a sustainable way out of the crisis.
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