Debt, Deleveraging and…Default?

The three Ds are lurking, thought not necessarily in equal amounts. That’s hardly surprising, but the details are somewhat sobering, as a new McKinsey & Co. report shows: Debt and Deleveraging: The Global Credit Bubble and its Economic Consequences.

Among some of the notable points in the analysis:

  • “Enabled by the globalization of banking and a period of unusually low interest rates and risk spreads, debt grew rapidly after 2000 in most mature economies. By 2008, several countries…had higher levels of debt as a percentage of GDP than the United States.”
  • “Deleveraging has only just begun…”
  • “…Specific sectors of five economies have the highest likelihood of deleveraging…[in the U.S., the household and commercial real estate sectors have a relatively high likelihood of deleveraging]”
  • “While we cannot say for certain that deleveraging will occur today, we do know empirically that deleveraging has followed nearly every major financial crisis in the past half-century…The historic episodes of deleveraging fit into one of four archetypes:
  1. …credit growth lags behind GDP growth for many years;
  2. massive defaults;
  3. high inflation; or
  4. growing out of debt through very rapid real GDP growth caused by a war effort, a ‘peace dividend’ following war, or an oil boom.”
About James Picerno 900 Articles

James Picerno is a financial journalist who has been writing about finance and investment theory for more than twenty years. He writes for trade magazines read by financial professionals and financial advisers.

Over the years, he’s written for the Wall Street Journal, Barron’s, Bloomberg, Dow Jones, Reuters.

Visit: The Capital Spectator

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