Global Debt Is Exploding At A Shocking Rate

The primary reason why the global financial system is on the verge of daily collapse, and is only held together with monetary superglue thanks to constant intervention of central banks, is because of debt. And, as BofA's Barnaby Martin succinctly puts it, much more debt is coming since "the legacy of the COVID-19 shock is debt, debt, and more debt." In short: use even more debt to "fix" a debt problem.

So in this world of explosive credit expansion coupled with tumbling economic output where helicopter money has become the norm, central banks - and specifically the ECB - are scaling their QE policies to monetize and absorb much of this debt (relieving the pressure on private investors to buy bonds). More debt "hotspots" means more vulnerabilities for the global economy.

We won't preach about the consequences of this debt binge which has catastrophic consequences, but below we lay out some of the more stunning facts of global debt levels at the end of Q1 2020 as compiled by the BIS, courtesy of Martin:

  • Global debt/GDP surged to an all-time high in Q1 2020, with overall debt for the non-financial sector now worth 252% of global GDP. This is up from 241% at the end of 2019, the biggest quarterly jump ever according to BIS data.

  • The chart also confirms that central bank inflation targets are much higher than the "official 2%:" to erase this debt, central banks needs inflation to be in the 10%+ range. Anything below that would require debt defaults instead of inflation to wipe away the debt -- and that is unacceptable.
  • This increase reflects the fallout from the first few weeks of the COVID-19 crisis, with most advanced economies implementing total or partial lockdowns in March. Hence, the historical contraction in GDP growth observed worldwide in Q2 and the debt surge from both governments and non-financial corporations will translate into an even bigger rise in the global leverage ratio in Q2 2020.
  • Pre-existing vulnerabilities have been laid bare by the nature of the COVID-19 shock. While both advanced economies (DM) and emerging markets (EM) have seen their leverage ratios jump, the latter have observed a rapid increase since 2012 (Chart 13). The relatively deeper COVID-19 recession expected for some EM economies - the OECD September 2020 Economic Outlook sees India and South Africa GDP falling by 10.2% and 11.5%, respectively - will likely magnify the jump in some EM's leverage ratios.
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