Photo: McKinsey Global Institute
The U.S. has made significant strides in reducing its debts and may actually return to some semblance of normal by the middle of next year.Europe and Japan, meanwhile, are screwed.
Those are the two key conclusions from an in-depth analysis of global debt levels by the McKinsey Global Institute, a research arm of the consulting firm McKinsey & Co.
In preparing its report, McKinsey took a close look at the “deleveraging” experiences of Sweden and Finland, both of which suffered financial crises in the early 1990s, and compared them to the experience of the U.S., Europe, and Japan in recent years.
Contrary to the howls of doom-and-gloomers who think the U.S. dollar is about to collapse in insolvency, McKinsey’s analysts actually conclude that the U.S is on the road to recovery.
Europe, on the other hand, has not taken the necessary steps to fix its problems, and will take much longer to work its way out from under the debt overhang.
McKinsey has posted its whole report for free online. You can download it here.
In the meantime…
The current deleveraging should follow this pattern, McKinsey argues. But some countries are much farther along than others. The U.S., for example (blue line below), has a relatively restrained level of debt-to-GDP. And the U.S. has begun to deleverage. Japan, the U.K., France, and Spain, meanwhile, are still piling on debt.
The composition of debt also varies across countries. The U.S. is balanced between government, the financial sector, corporations, and households. The U.K., meanwhile, is buried in financial-sector debt.
The first phase of recovery is recession. We've already had that. The second phase is private-sector deleveraging. And in the U.S., anyway, that process is now well along.
U.S. household debt has also fallen in absolute terms, not just relative to disposable income. Two-thirds of the reduction has come from default.
If U.S. household deleveraging follows Sweden's, there's still plenty left to come. Sweden's household debt relative to income fell 41% from the peak.
U.S. household debt, by the way, is very different by state. Folks in Nevada are broke. Folks in New York are doing OK.
Of course, it's a global economy now, and other countries are not doing as well as the U.S. The U.K., for example, has a debt load that's nearly twice as big as the U.S. (relative to GDP). And it's still growing!
And the Eurozone banks are MASSIVELY exposed to Eurozone debt, especially French banks. Better hope the ECB keeps bailing out everyone.
And don't even think about Japan. Japan has NOT followed the Sweden pattern. Japan's private sector never really kicked in, so the Japanese government has just continued to pile up debt. And it has been doing that for two decades now. Of course, it also took Japan a decade to force its banks to start writing off crappy loans ...
The good news is that, assuming the private sector continues to recover, we can soon start cutting government spending. And, eventually, that should help us get our debt-and-deficit problem under control.
And house prices should eventually start to recover, the way they did in Sweden. In fact, many experts think the U.S. housing market is beginning to recover right now.
The bottom line ... We still have plenty of issues to work through, namely continued private-sector deleveraging and then a decade or so of getting our government budget deficit under control. But, unlike Europe and Japan, we're off to a good start.
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