The debt crisis is far from over

There is a lot of borrowing around these days. How can we judge this? Last year, total securities issuance came in at $11.5 trillion, about 25 per cent of world GDP according to IMF estimates. This statistic is every bit as batty — and as true — as the tabloid headline in 1989 that the Japanese Imperial Palace in Tokyo was worth the same as California.

The proximate cause of the unprecedented growth in debt was the interlocking but very different priorities of two empires at different stages of their development. China has needed to head off the social unrest brought about by the urbanisation of its population at a rate of 20 million a year. The United States’ priority is to burn incense at the altar of consumerism. Financial innovation has allowed the transfer of wealth in an easterly direction, but it has taken an extended period of time to achieve a full majesty. Its genesis dates back to an important decision by the US Federal Reserve some 10 years ago, when demand faltered in the face of an overabundance of supply in the world. Even a small shortfall in demand would have resulted in a multiplied effect on world prosperity — a recession can easily turn into a slump in these circumstances. What wage growth could not do, borrowings could achieve, however, and Alan Greenspan gave things a helping hand with cheap and plentiful money — a sackful of grit under the spinning wheels of the economy. Money has been cheap and plentiful ever since. The intention, of course, was to wait for real wage growth to resume — but the nonplussing fact is that, over the last decade, it hasn’t for the great majority of the US workforce. The Swedish economist Knut Wicksel once observed that if you keep interest rates below their natural level indefinitely, then asset prices will go to infinity.