The New York Times: The Next Debt Bombs

Article by David Leonhardt in The New York Times

“The world has never had as much debt as it has right now,” Aaron Kuriloff of The Wall Street Journal wrote earlier this year.

The world’s combined debts — held by governments, consumers and businesses — has risen to more than 300 percent of global gross domestic product, the paper explained. There’s nothing magical about that number, but it was notably higher than the level in 2007, before the financial crisis began, when it was about 260 percent.

Since then, many consumers have cut down on their debt, but governments and companies outside of the financial sector have taken on more.Some of the riskiest loans, Kuriloff wrote, seem to include “corporate debt in China, foreign-currency borrowing in emerging markets” and riskier corporate loans in the United States.

The obvious question is whether the rise in borrowing has put the global economy in danger of another financial crisis. It’s impossible to know the answer. But I think there are reasons for concern.

Governments and many businesses have high levels of debt — while many middle-class and lower-income families across Europe and the United States have been struggling with slow-growing incomes. Historically, periods of extreme economic inequality, like the 1920s and the early 2000s, have been prone to financial crisis.

Most professional forecasters say a recession is unlikely in the next 12 months, but it’s hard to put too much stock in that prediction — because professional forecasters almost always say a recession is unlikely in the next 12 months.

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