Economics, International economy, Pethokoukis

Debt among advanced economies now tops 1,000% of GDP

Credit: OECD

Credit: OECD

The OECD: “Debt as a share of GDP has surged in the OECD since the mid-1990s. Average total economy financial liabilities have gone beyond 1,000% of GDP during the recent crisis. The degree of total economy indebtedness differs strongly across countries, largely reflecting the relative importance of the financial sector. The size of the financial sector varies considerably, being markedly higher in countries which host financial centres.”

And here’s why you should care:

1. High debt levels can create vulnerabilities, which amplify and transmit macroeconomic and asset price shocks.

2. High debt levels hinder the ability of households and enterprises to smooth consumption and investment and of governments to cushion adverse shocks.

3. When private sector debt levels, particularly for households, rise above trend the likelihood of a sharp economic downturn increases.

4. Measures of financial leverage give less warning of an impending recession and typically only deteriorate once the economy begins to slow and asset prices are falling.

5. During a recession debt typically migrates from the private sector to the government sector.

6. Targeted macro-prudential policies would help in addressing future run-ups in debt.

7. Robust micro prudential regulation and maintaining public debt at prudent levels can help economies cope with adverse shocks.

8. Legal frameworks can facilitate debt write-downs, but this may come at the price of a higher cost of capital.

Credit: OECD

Credit: OECD

4 thoughts on “Debt among advanced economies now tops 1,000% of GDP

  1. I’m not exactly sure what this means, except that a lot more money is changing hands these days. By including financial debt includes a great many reciprocal obligations; there is probably also a great deal of double-counting among the four segments. (E.g, households own a great deal of public and corporate debt in their retirement accounts, but have to borrow to buy their homes, make improvements, etc.) Also, what is the baseline? How has it been trending, and is there any correlation between this figure and financial crises in the past?

  2. OK, now I see the historical series, going back to 1970. It looks like it was fairly stable in the 1970s, began to rise in the late ’80s, and really took of in the last decade, but primarily in the financial sector. Again, how much of this is repo/swap activity and suchlike? What does it mean that corporate borrowing is obviously much larger than the sum of household and government debt? Is this a bad thing—it sounds like a natural state of affairs. Obviously, the debt/lending ratio must total up to zero, but how do these four segments stand in relationship to one another in this respect?

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