Financial Snapshot: The $US200 trillion global debt mountain

How big a threat is it really and what are the implications for investors?

“It’s not what you own that gets you into trouble, but what you owe.”

Excessive debt tends to be at the centre of most scare stories regarding the investment outlook – whether they relate to China, public debt in developed countries, corporate debt in the US or Australian household debt. The standard debt related scare story runs something along the lines of “we have lived beyond our means. Any attempt to prevent a debt implosion won’t work or will just delay the inevitable. Divine retribution will get us in the end!” One big debt scare that gets wheeled out is that total global debt outstanding has reached a new record high of nearly $US200 trillion and either that on its own or in combination with any significant rise in global interest rates will trigger the next crisis. To be sure problems with debt or a desire to reduce it are part and parcel of most financial crises and economic downturns. And total global debt has indeed reached record levels. But that’s not the same as saying another financial crisis is imminent. This note looks at the main issues.

Key points

  • Global debt levels have reached new records both in dollar terms and in relation to GDP.
  • Countries with very high gross debt to GDP include Japan, Belgium, Portugal and Greece. Emerging market debt is relatively low and Australia is towards the low end except in relation to household debt.
  • Global debt is not as big a concern as headline numbers suggest & debt to income ratios will tend to rise through time simply because of saving & investing.
  • A key sign to watch would be a broad based rapid rise in debt along with a generalised surge in asset prices. At present this is only evident in pockets globally.

Read the full article by Dr Shane Oliver, Head of Investment Strategy and Chief Economist for AMP Capital.

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