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Throughout history, rising global debt has been followed by financial and/or economic crisis, again and again. There's lots of debate and little agreement as to

by cs702 6y ago

Throughout history, rising global debt has been followed by financial and/or economic crisis, again and again. There's lots of debate and little agreement as to why rising debts have preceded crises, but there's no debate about the fact that this is what has happened in the past. A team of World Bank economists wrote a comprehensive report precisely about this topic in December 2019, right before global debt started soaring during the pandemic. Their conclusion: > The global economy has experienced four waves of debt accumulation over the past fifty years. The first three debt waves ended with financial crises in many emerging and developing economies. The latest, since 2010, has already witnessed the largest, fastest and most broad-based increase in debt in these economies. Their total debt has risen by 54 percentage points of GDP to a historic peak of almost 170 percent of GDP in 2018.[a] Since then, global debt has risen by more than 2x in relation to GDP. -- [a] https://www.worldbank.org/en/research/publication/waves-of-debt https://www.worldbank.org/en/research/publication/waves-of-d...

PragmaticPulp 6y ago
The debt-to-GDP ratio has two inputs: Debt and GDP. The ratio has partially increased due to rising debt, but most of the increase came from falling GDP in this case. I agree that excessive debt is bad, but I also can see that counter-cyclical fiscal policy can help shorten recessions such as the COVID recession. Note that only 1/3 of the headline number comes from government debt. The rest is private sector. I’m in the camp that thinks we’ve overcompensated for this recession with too much spending, but I also don’t think it’s as catastrophically bad as some of the claims. We’re running the economy red hot and it will eventually pull back, but at the same time we would have had a recession right away due to COVID lockdowns if not for some amount of stimulus. It’s a tricky balance to get right and we’ll never get it perfect, but I also don’t think that we’re winding up for some sort of economic collapse. Pullbacks will happen, but like previous recessions they too will end. I know several people who have been betting on a recession for over 5 years now by exiting the stock market. At this point we could have a 50% drop in the stock market and they’d still only break even on that bet.
- cs702 6y ago
  IMHO, the least-worst choice for governments everywhere has been to partially freeze their economies into lock-down, and borrow and spend however much is necessary, for as long as necessary, to keep human and capital infrastructure in decent shape until the pandemic is history. The alternatives would have been horrific. But I suspect we'll have to reign debts at some point, either via high taxes (relatively benign, but unpleasant), high inflation rates (more unpleasant and destructive), financial/economic crises (extremely unpleasant and destructive), or some other mechanism.
ffggvv 6y ago
rising debt is usually preceded by loose money/cheap credit. which leads to irresponsibile speculation and manias. and then ofc we will be expected to bail the speculators out at the end of this
savanaly 6y ago
Are we 100% sure it's not an ice cream sales cause shark attacks correlation?
fshbbdssbbgdd 6y ago
If x and y are correlated, it could be the case that x causes y, y causes x, or x and y are both caused by z. Could it be the case that high levels of debt and crashes are both caused by the business cycle? If debt increases when the economy grows (because debt is used to fund investment), and the economy grows and recedes in a cycle, won’t we expect there to always be lots of debt before the recession? In the counterfactual where we don’t have debt, we’d also have less investment, so perhaps development would be permanently lower (ie. worse than the low point of each recession). This is similar to the observations that the stock market is always highest before a recession, or the tallest skyscrapers are built before a recession.

by cs702 6y ago

PragmaticPulp 6y ago

The debt-to-GDP ratio has two inputs: Debt and GDP. The ratio has partially increased due to rising debt, but most of the increase came from falling GDP in this case. I agree that excessive debt is bad, but I also can see that counter-cyclical fiscal policy can help shorten recessions such as the COVID recession. Note that only 1/3 of the headline number comes from government debt. The rest is private sector. I’m in the camp that thinks we’ve overcompensated for this recession with too much spending, but I also don’t think it’s as catastrophically bad as some of the claims. We’re running the economy red hot and it will eventually pull back, but at the same time we would have had a recession right away due to COVID lockdowns if not for some amount of stimulus. It’s a tricky balance to get right and we’ll never get it perfect, but I also don’t think that we’re winding up for some sort of economic collapse. Pullbacks will happen, but like previous recessions they too will end. I know several people who have been betting on a recession for over 5 years now by exiting the stock market. At this point we could have a 50% drop in the stock market and they’d still only break even on that bet.

cs702 6y ago
IMHO, the least-worst choice for governments everywhere has been to partially freeze their economies into lock-down, and borrow and spend however much is necessary, for as long as necessary, to keep human and capital infrastructure in decent shape until the pandemic is history. The alternatives would have been horrific. But I suspect we'll have to reign debts at some point, either via high taxes (relatively benign, but unpleasant), high inflation rates (more unpleasant and destructive), financial/economic crises (extremely unpleasant and destructive), or some other mechanism.

ffggvv 6y ago

rising debt is usually preceded by loose money/cheap credit. which leads to irresponsibile speculation and manias. and then ofc we will be expected to bail the speculators out at the end of this

savanaly 6y ago

Are we 100% sure it's not an ice cream sales cause shark attacks correlation?

fshbbdssbbgdd 6y ago

If x and y are correlated, it could be the case that x causes y, y causes x, or x and y are both caused by z. Could it be the case that high levels of debt and crashes are both caused by the business cycle? If debt increases when the economy grows (because debt is used to fund investment), and the economy grows and recedes in a cycle, won’t we expect there to always be lots of debt before the recession? In the counterfactual where we don’t have debt, we’d also have less investment, so perhaps development would be permanently lower (ie. worse than the low point of each recession). This is similar to the observations that the stock market is always highest before a recession, or the tallest skyscrapers are built before a recession.