The debt crisis: Five years on

Posted: September 13, 2013 in economy
Tags: , ,

FIVE years ago this weekend, the US authorities were struggling (and failing) to find a way of rescuing Lehman Brothers. We have been marking the anniversary with our schools brief series (and with a group of charts in this week’s issue). But having written Buttonwood before and since the crisis, I wanted to add my reflections.The first thing to note is that, as believers in the “new normal” argued and (dare one say it?) Reinhart and Rogoff predicted, financial crises have huge effects on global growth. In his excellent “long-term asset return study”, Jim Reid of Deutsche Bank calculates that the five year average of nominal GDP growth is at its lowest since the 1930s. This is a global figure so allows for emerging markets.Nominal GDP growth is the key because the vast amount of debt is in nominal terms. Not only does a fall in nominal incomes make it harder to service debt, but consumers (or businesses) may have taken on debt in the boom years on the assumption their nominal incomes would rise rapidly; the slowdown is thus a confidence shock.Writing about this phenomenon in our debt survey of 2010, I argued that the likely outcomes would be that economies would inflate, stagnate or default. The sluggish growth of nominal GDP indicates that the world is not inflating its way out of the debt. There has been very little in the way of default either. US banks have shrunk their …

via Economic Crisis


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