07 October 2014

Financial Times: We are trapped in a cycle of credit booms

Huge expansions in credit followed by crises and attempts to manage the aftermath have become a feature of the world economy. Today the US and UK may be escaping from the crises that hit seven years ago. But the eurozone is mired in post-crisis stagnation and China is struggling with the debt it built up in its attempt to offset the loss of export earnings after the crisis hit in 2008.

Without an unsustainable credit boom somewhere, the world economy seems incapable of generating growth in demand sufficient to absorb potential supply. It looks like a law of the conservation of credit booms. Consider the past quarter century: a credit boom in Japan that collapsed after 1990; a credit boom in Asian emerging economies that collapsed in 1997; a credit boom in the north Atlantic economies that collapsed after 2007; and finally in China. Each is greeted as a new era of prosperity, to collapse into crisis and post-crisis malaise.

The authors of a fascinating new report, Deleveraging: What Deleveraging?, do not entertain my dystopian hypothesis. Rightly or wrongly, they consider these credit cycles to be essentially independent events. Yet the report is invaluable. It brings out clearly the limited nature of post-crisis deleveraging, the plight of the eurozone and the big challenges now facing China.

If you look at the world as a whole, there has been no aggregate deleveraging since 2008. The same holds for the high-income economies, viewed as a single bloc. Financial sectors have deleveraged in the US and UK, however; so, too, have households in the US and, to a lesser degree, the UK. Liabilities of households have even converged between the US and the eurozone as a whole.

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