A brand new study released by the World Economic Forum (WEF) in collaboration with McKinsey (which is a must read if only for its plethora of charts which we are certain will be used and reused in thousands of posts and articles over the next year), finds that while global credit stock doubled from $57 trillion to $109 trillion in just 10 years (from 2000 to 2010), it will need to double again to an incredible $210 trillion by 2020 in order to provide the necessary credit-driven growth (in a recursive way, whereby credit feeds growth, and growth requires additional credit issuance) for world GDP to retain its current growth rate. And while the goal seeked conclusion is obviously nothing but propaganda for the banking syndicate meant to facilitate the need for endless credit issuance spin (after all how on earth can world GDP growth occur based on something productive like manufacturing when there is only $100 trillion of free cash chasing worthless and rapidly amortizing assets), the study did warn (timidly) that leaders must be wary of new credit "hotspots" of excess lending, as the world emerges from a financial catastrophe blamed in large part "to the failure of the financial system to detect and constrain" these areas of unsustainable debt. In other words: credit doubling blew up the world financial system, but if you promise to behave this time, go ahead and double the world debt again.
Where does the WEF see the bulk of the credit growth coming from? Why Asia of course.
Rapid credit growth is forecast in developing markets, which will add almost US$ 50 trillion to their credit stock by 2020. China’s credit demand will lead global credit growth: it will require US$ 20 trillion more credit in 2020 than in 2009, with 80% of that growth going to the wholesale segment. In developed markets, including the large Western economies, most of the growth will come from the government segment. In North America alone, the value of government bonds is expected to grow by US$ 12 trillion to 2020. Deleveraging in overheated retail and wholesale segments of the developed world will be significant.
$20 trillion more credit in 10 years in China? That may, just may, lead to a slight pick up in food prices...
On the topic of hotspots, or areas where credit growth may be problematic, the WEF basically says that virtually every area that needs to double (or more) its credit in the next decade, could go boom.
Even though some economies will deleverage over the coming decade, the analysis projects a significant number of credit hotspots across the world in 2020 – including retail credit hotspots in countries representing almost half of global GDP. Government credit hotspots are projected for countries representing 13-14% of world GDP – although Western Europe will be more vulnerable. In wholesale credit, Asia and Western Europe will be the main drivers of hotspots in 2020 (Exhibit iv).
Yet the only relevant take home message is that absent reignition of the securitization markets, which as BofA, JPM and Citi are all finding out now the hard way, may have been nothing but massive fraud from the get go, in which nobody really tracked who owns what in that 4th and 5th layer of leverage, growth will simply not resume.
The need to revitalize securitization markets. Without a revitalization of securitization markets in key markets, it is doubtful that forecast credit growth is realizable. There is potential for securitization to recover: market participants surveyed by McKinsey in 2009 expected the securitization market to return to around 50% of its pre-crisis volume within three years. But to rebuild investor confidence, there will need to be increased price transparency, better data on collateral pools, and better quality ratings.
In other words, the world must give up all prudent hope to having a vibrant and stable credit system, and embrace without any doubt the same ludicrous model that led to the kinds of synthetic idiocy that virtually blow up the world when it had $100 trillion in debt, if we even hope to have the kind of growth that explosive credit growth (and nothing else!) afforded the world in the past ten years. Just imagine how this will play out when the total debt is $200 trillion instead. And one wonders why all the institutional whores are against the gold standard, with its fixed limitation on the issuance of credit-money. So much better to live on imaginary promises of repayment, coupled with guarantees of 4% GDP growth in perpetuity until the world certainly blows up all over again, only this time only Mars would be able to bail out earth. No seriously.
And while the assumptions and conclusions of the report are predictable from a mile away, the real goodies are the charts. Here are the key ones:
This is the broad summary of where we global credit stock was, where it is, and where it is supposed to go ($213 trillion) just to keep GDP flat!
"If it worked in the past, it must work in the future" - the rules of thumb that must be true in order to allow an exponential growth curve in global credit stock:
Nothing to see here- global Debt to GDP is expected to continue growing from its current base of about 200% (higher for OECD than total):
A forecast of growing credit stock by region indicates that China, Africa and the ROW better be equipped to handle the required pick up in lending:
Since past is prologue, here is how historic relationships between GDP/capita and total debt/GDP have worked out in the past. Take home: only massive (and preferably cheap) credit leads to growth:
Here is where the bulk of the bond issuance will have to come from: guess what - taxpayers will be on the hook, as the vast majority has to be sourced by government bonds: Austerity... really?
And where total bank lending is supposed to originate from...
In the process of doubling global debt, there may 'even' be "hotspots" - here are the key regions and the primary drivers for debt growth: retail segment credit, wholesale segment credit, and of course, government segment:
Going back to the 2010 word of the year, contagion, here is who the WEF believes are the riskiest countries. Not surprisingly, the US is front and center...
For those who believe that Europe is far riskier than the US, here is a more granular look at the Eurozone's biggest contagion risks:
Lest we forget, massive credit growth leads to unfortunate side-effects... Such as sovereign bankruptcy, and near total financial armageddon:
But what is certainly the most important chart, and the one we will have much more to say about in the future, is the consolidate global balance sheet of financial institutions. The only thing worth nothing is the tiny sliver in the bottom left of sources of wealth, affectionately called "equity" - this is the error buffer currently built into the system. And somehow this 3% of total wealth uses is supposed to preserve systemic stability when total global debt doubles from current levels.