The warning signs are clear. Debt is rising on every continent and especially in the business sector, which has spent the past decade ramping up its borrowing to previously unheard-of levels.
Last October, the International Monetary Fund said that almost 40% of the corporate debt in eight leading countries – the US, China, Japan, Germany, Britain, France, Italy and Spain – would become so expensive during a recession that it would be impossible to service. In other words, tens of thousands of businesses, employing millions of people, would have gambled with high levels of borrowing and lost, making themselves insolvent.
Worse, the IMF said the risks were “elevated” in eight out of 10 countries that boasted systemically important financial sectors, adding that this situation was a repeat of the years running up to the last financial crisis.
Last month, the World Bank joined in. It said emerging-market and developing economies (EMDEs) had pushed their borrowing to a record $55 trillion (£42tn) in 2018.
Unlike the richer nations already mentioned, the 100 EMDEs across Africa, Asia and South America covered by the report were affected by rising private-sector debt coupled with higher government borrowing. And this extra state borrowing is not only larger, it has also changed in character. First, it has gone from being largely directed to investment spending to, more recently, being used simply to cope with the costs of health, education and welfare. Second, it is being more commonly borrowed from international investors hungry to lend developing countries cash at, relatively speaking, sky-high rates of interest.
There is little evidence that anyone is paying any attention to the dire misgivings expressed by either organisation. This year, the US S&P 500 stock market resumed its long-term (100-year) upward trend following a near 200% increase since 2010. Likewise, the German Dax has soared over the past 10 years from 5,500 to over 13,000 while the Paris CAC 40 has almost doubled to 6,000.
Britain’s main market in shares has struggled to make any headway over the past three years while Brexit uncertainty dominated. Yet the FTSE 100 shows a gain from less than 4,000 in 2009 to 7,600 today.
Some analysts have argued that the IMF and World Bank are over-cooking their analysis after missing the last financial crash – seeing danger around every corner. Others dismiss them as archaic remnants of the postwar consensus that fail to understand how the global economy has entered a new phase, one that keeps stock markets humming along and bad recessions at bay.
In the short term at least, the optimists could be right. And that is largely down to the actions of the US central bank, which was on course to repeat the mistake of 2005-07, when it matched rising debt levels (especially in sub-prime mortgage loans) with rising interest rates, triggering the kind of financial crash that the IMF and World Bank now fear is around the corner. This time, the Federal Reserve retreated after pushing base rates to almost 2.5% – still well short of the pre-crash normality of 4%-5%, but higher than almost everywhere else. After three rate cuts last year, the US economy starts 2020 with the base rate back in a range between 1.5% and 1.75%.
Without higher interest rates, everyone can keep merrily borrowing. And when, for most businesses, borrowing rates remain below their potential income growth rate – even when that is lacklustre – there is not the usual imperative to boost growth through investment in order to afford higher debt repayments.
But really, this is a back-to-front way of discussing the issue. Most of the problems afflicting the global economy relate to a lack of demand for goods and services, at least on average, compared with the years prior to the 2008 crash. And much of the weak demand relates to our ageing populations, which, in the main, focus more on storing up savings for retirement than on spending.
They are also in the habit of voting for governments that promise to keep taxes low and property prices high, allowing them to accumulate even more wealth. Donald Trump and Boris Johnson fit that bill.
Through their pensions and private investments they treat companies like cash machines, demanding a higher dividend every six months. Much of the borrowing by companies has been to pay these dividends, not to invest.
Baby boomers will pretty much all have retired by the end of this new decade, so most will have stopped investing and just be withdrawing investment funds. And it is this turn of the wheel of fortune that will wreck the global economy – if the accumulation of debt and the climate crisis haven’t got there first.
Credit: Phillip Inman