Macroscope | The world’s mounting debt crisis must solved before it blows up in our face
- The lack of an exit strategy from the monetary excess is catching up with the world
- The QE largesse did not go into investment and consumption but it did prop up financial institutions that were swaying on the edge of the abyss
Forget about China’s so-called “debt trap diplomacy” – it’s a mere mousetrap compared to the jaws of two more vicious traps that are waiting to close on the global economy. One is the generalised (public and private sector) debt trap and the other is the more insidious “QE (quantitative easing) trap”.
Both have been masked by the high-profile threat of trade and economic wars between the world’s two biggest economies – the United States and China. For all the hundreds or even thousands of headlines that trade wars have grabbed, the QE and debt traps have been lucky to get even a handful.
But things are about to change, and growing awareness of this fact meant that “Davos Man” was a more worried man this year as the world’s wealthiest tried to drown their fears in champagne at the Swiss resort. The spectre of an impending debt crisis was invoked far more frequently than in past years.
“In advanced countries public debt is at levels not seen since the second world war [and] emerging market public debt has [reached] levels last seen during the 1980s debt crisis,” the IMF said. And billionaire investor Seth Klarman warned that debt markets might refuse loans or demand penal interest rates before long.
The debt and QE “traps” are intimately connected. Waves of quantitative monetary easing in the US, Japan and Europe may have saved the world from systemic financial collapse and economic depression after 2008, but the historically low interest rates they engendered has led to universal over-borrowing.