Exactly one year ago, in its Global Financial Stability report, the IMF issued a stark warning when looking at the soaring level of private sector debt: it found that more than 20% of US corporations are at risk of defaults once interest rates rise, and calculated that the combined assets of firms threatened by default - those who earnings do not cover their interest expense - could reach almost $4 trillion.
Fast forward exactly one year to today, when the IMF once again sounded the alarm on debt, only this time on the public side of the ledger, warning about - what else - excessive global borrowing, and noting that with a total of $164 trillion of debt, or 225% of global debt to GDP...
... the world’s public and private sectors are more in debt now than at the peak of the 2008 financial crisis, when global debt/GDP peaked at 213%.
Some more details from the IMF: while advanced economies are responsible for most global debt, in the last ten years, emerging market economies have been responsible for most of the increase. In fact, as we showed several months ago, China alone contributed 43% to the increase in total global debt since 2007. In contrast, the contribution from low income developing countries is barely noticeable.
When looking at the big picture, needless to say it's all about the US, China and Japan: these three countries alone accounted for half of the $164tr total in global public and private sector debt. And speaking again of China, its debt surged from $1.7 trillion in 2001 to $25.5 trillion in 2016, and was described by the IMF as the "driving force" behind the increase in global debts, accounting for three-quarters of the rise in private sector debt in the past decade.
Here we should note that the IMF's definition of debt is clearly different from that of the Institute of International Finance (IIF), which last week calculated that global debt had hit $237 trillion in debt or 318% debt/GDP.
Whatever the differences in debt calculating methodology, both agencies can agree on one thing: debt has never been greater and it once again poses an existential threat to the so-called "coordinated recovery", which of course, only exists thanks to said surge in global debt.
In that vein, and continuing its warning from yesterday's World Economic Outlook, the fund warned there is an urgent need to reduce the burden of debt in both the private and public sectors to improve the resilience of the global economy and provide greater firefighting capability if things went wrong: "Fiscal stimulus to support demand is no longer the priority," the IMF said in the 156-page report.
What we again find odd is how quiet everyone was for the past ten years when central banks, by keeping interest rates at record low levels, enabled the world's biggest debt issuance spree, for both public and private debt, and now that debt is at a level that even Goldman recently said is no longer sustainable, suddenly everyone - from central banks, to bank CEOs, to NGOs - is screaming from the rooftops how dangerous debt really is.
As an amusing aside, in a blog post posted alongside the Fiscal Monitor report, IMF director Vitor Gaspar said that the "United States stands out" and singled out the US for criticism, warning was the only advanced country that was not planning to have a falling burden of debt because tax cuts would keep public borrowing high.
“We urge policymakers to avoid pro-cyclical policy actions that provide unnecessary stimulus when economic activity is already pacing up,” Gaspar said; what he really meant was "Trump, stop what you are doing before you lead to a debt funding crisis, that finally bursts the global debt bubble. "
There is another threat: rising rates. The IMF said that the interest burden has doubled in the past ten years to close to 20% of taxes, an escalating cost which "reflects in part the increasing reliance on nonconcessional debt, as countries have gained access to international financial markets and expanded domestic debt issuance to nonresidents."
Echoing its warning from April 2017, The IMF again noted it is was concerned that private sector debts make the global economy more vulnerable to a new financial crisis started by "an abrupt deleveraging process" where borrowers all tighten their belts simultaneously, sending the economy into a nosedive.
“In the event of a financial crisis, a weak fiscal position increases the depth and duration of the ensuing recession, as the ability to conduct countercyclical fiscal policy is significantly curtailed."
So what should policymakers - having gotten used to flooding the world in debt - do? Why the opposite, of course: as the FT summarizes, with the global economy growing strongly, the IMF recommended countries stop using lower taxes or higher public spending to stimulate growth and instead try to reduce the burden of public sector debts so that countries have more leeway to act in the next recession.
Translation: no tax cuts, no increases to deficit spending, i.e. another dig at everything that Trump is doing.
In fact, the IMF singled out the Trump administration’s tax cuts for criticism, since they left the US with a deficit of 5% of national income into the medium term and a persistently rising level of debt in GDP. It also explains why the IMF forecasts the US is the only nation whose debt load will rise in the next 5 years.
"In the United States fiscal policy should be recalibrated to ensure that the government debt-to-GDP ratio declines over the medium term. This should be achieved by mobilising higher revenues and gradually curbing public spending dynamics, while shifting its composition toward much-needed infrastructure investment."
There was the obligatory dig at bitcoin, although the IMF at least conceded that unlike some $500 trillion in derivatives, a few billion in bitcoin and ethereum do not currently appear to pose any risk to financial stability, "But they could do if they become more widely used", in other words, don't you dare even think of alternatives to fiat currencies.
Going back to "the debt problem" the IMF admitted that it was not only limited to advanced economies, with middle-income countries also racking up borrowing higher than that which led to the debt crises of the 1980s. There was also a particular warning about China whose gargantuan scale and opaque financial system poses a massive risk to stability, the IMF says. The silver lining, the report noted, is that Chinese banks have reduced their use of risky short-term borrowing, in response to tighter regulation. The report also judges that the global banking system is stronger now than it was at the time of the crisis. But it adds that reforms need to continue.
As a result, the IMF again recommended that countries raise taxes and lower public spending to decrease annual borrowing and get the burden of debt on a firmly downward path now that there is no need for fiscal stimulus. The few exceptions to that advice included Germany and the Netherlands, which the IMF said had “ample fiscal space” to boost public investment in infrastructure and enhance the long-term resilience of their economies.
Here, the Keynesian would probably go nuts, and say that such a policy promotes saving, and is tantamount to austerity, which for some reason, is equivalent to economic death in a world where total debt/GDP is either 225% or 316% depending on whose methodology one uses.
Actually, come to think of it, it all makes sense when one considers that it is the very policies that define modern finance and economics, that have led the world to this precipice. In fact, reading the IMF report between the lines, it is nothign more than advance scapegoating for the inevitable global debt crisis that is coming, and which not even the IMF is hiding any more. What is most comical - if completely expected - is that the IMF is now blaming it all on Trump: not on generations of economists who steered the world to the point where there is more than $3 of debt for every $1 of GDP, and not on central bankers who flooded the world with debt so that the richest 0.01% can be richer than their wildest dream. Nope: it's all Trump's fault.
Somehow we doubt this advance damage control will work after the next, and likely final, crash.