Monday , 25 September 2017


Decades of Deficits Dictate De-leveraging, Deflation and Decline

So say edited excerpts from a post* at www.EconoMatters.com.

Lorimer Wilson, editor of www.munKNEE.com (Your Key to Making Money!), has edited the article below for length and clarity – see Editor’s Note at the bottom of the page. This paragraph must be included in any article re-posting to avoid copyright infringement.
 
Graphic Source: Thomsonreuters.com

 

In the not so distant future almost all countries in the world could end up in one of three classes due to decades of deficit spending:

  1. bankruptcy,
  2. credit counseling or
  3. debt renegotiation,

That also means many nations, after the storm of debt/banking crisis, will need to implement various government austerity programs, and households will commence debt deleveraging–a long and painful process….

The Deleveraging Cycle

Using the previous deleveraging cycle of Sweden’s and Finland’s post financial crisis during the 1990s as a baseline, McKinsey compared the current progress of the U.S., the U.K. and Spain.

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What KcKinsey found is that the United States may have been half way through that process, while households in Spain and the United Kingdom have only just begun to deleverage. (see chart below).

a) U.S.: McKinsey reckons the U.S. could return to trend as early as mid-2013, but cautions:

“… after US consumers finish deleveraging, they probably won’t be as powerful an engine of global growth as they were before the crisis. That’s because home equity loans and cash-out refinancing, which from 2003 to 2007 let US consumers extract $2.2 trillion of equity from their homes—an amount more than twice the size of the US fiscal-stimulus package—will not be available.”

b) Spain: More despair would come to Spain:

“….Today, Spanish corporations hold twice as much debt relative to national output as do US companies, and six times as much as German companies. Debt reduction in the corporate sector may weigh on growth in the years to come.”

c) U.K.: The prospects of the U.K., even though not part of the Euro sovereign bailout discussion yet, is not that much better:

“….we find that the ratio of [UK] household debt to disposable income would not return to its long-term trend until 2020.”

Is a Deflation Cycle Next?

What’s more, “Significant public-sector deleveraging typically occurs only when GDP growth rebounds, in the later years of deleveraging.” As such, since today’s deleveraging economies are larger and under more challenging circumstances, the current deleveraging process could take longer than the historical experience of five to seven years from Sweden and Finland, in McKinsey’s baseline suggesting that the world, most likely, could experience a long deflationary period although, in our opinion, not a Japanese-style one due to Japan’s unique demographics, banking and government systems.

[Nevertheless,] we do think darker days are ahead, and America’s lost decade would at least get an extension.

*http://www.econmatters.com/2012/06/after-sovereign-debt-crisis-comes.html  (To access the above article please copy the URL and paste it into your browser.)

Editor’s Note: The above article may have been edited ([ ]), abridged (…), and reformatted (including the title, some sub-titles and bold/italics emphases) for the sake of clarity and brevity to ensure a fast and easy read. The article’s views and conclusions are unaltered and no personal comments have been included to maintain the integrity of the original article.

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