ABA Banking Journal - November/December 2017 - 18

> ECONOMIC OUTLOOK

Unsustainable Global Debt?
BY JAMES CHESSEN

DEBT CAN BE a good thing, but too much of it can be a problem.
The Great Recession is a prime example of borrowing by households well
beyond the growth in income. In the seven years before 2007, household
debt in the U.S. rose 40 percent (relative to GDP), supported by a 42 percent
growth in financial sector debt.
In the seven years that followed
the financial crisis, households
deleveraged, dropping debt 18
percent relative to GDP. Financial
institution debt dropped as well,
by 27 percent. Not surprisingly,
the government stepped in, filling
the deleveraging gap and growing
its share of debt to GDP by 60
percent. That increase continues to
this day with the government debtto-GDP ratio near 100 percent-
which is considered the point at
which government debt becomes
unsustainable, dramatically reducing
the country's potential growth.
Given the trends in entitlements and
revenues, the Congressional Budget
Office projects it to rise to 150 percent
of GDP in 30 years.
Debt growth is not just a U.S.
phenomenon, but one shared across

the globe. In fact, in the seven years
before the financial crisis, global debt
increased by a whopping $83 trillion,
with the U.S. accounting for $23
trillion. In the seven years thereafter,
$43 trillion more was added to global
debt with the US contributing only $8
trillion. The shift in debt went from
households and financial debt to
government and corporate debt.
By far, the biggest driver of global debt
has been China. Overall, debt more
than quadrupled since 2007, with
real estate loans counting for half of
it. Pictures of empty skyscrapers are a
stark reminder of the extensive losses
waiting to be recognized. According
to the latest Institute of International
Finance data, non-financial debt in
China is 167 percent of GDP (see
chart), far more than double the same
ratio in the U.S.

CHINESE DEBT GROWING RAPIDLY
Debt as % of GDP
350%
300%
250%

Household
Corporate
Financial
Government

200%
150%
100%

What are the takeaways?
The growth in debt worldwide did
help drive economic growth at a
critical time, but the levels are now
so high that large headwinds are
forming and likely to be an anchor
on future growth. In the U.S., with
weak productivity and slow labor
force growth-and without a boost
from tax reform-it's hard to see how
the economy could grow consistently
beyond 2 percent.
The pace of global debt has been
slowing, but that's largely due to
improvements in mature markets.
Emerging markets are another story
and feel like a disaster waiting to
happen. Any downturn will expose
large numbers of weak borrowers
and increases of rates by the central
banks will only compound the
problems. While China's government
has the capacity to absorb the
corporate debt if that sector falters,
it will not be without pain that will
spread across the globe. If the Great
Recession taught us anything, it's
that high leverage can smack down
an economy in a hurry, taking years
to recover.

JAMES CHESSEN is chief
economist at ABA.

50%
0%
2000

2007

Source: Institute of International Finance

18

Much of that debt has been financed
by China's shadow banking system.
As China shifts toward domestic
consumption, household debt also
has jumped significantly and now is
close to 45 percent of GDP.

ABA BANKING JOURNAL | NOVEMBER/DECEMBER 2017

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2017



Table of Contents for the Digital Edition of ABA Banking Journal - November/December 2017

Chairman’s View
Upfront
Legal Briefs
Economic Outlook
Power Up Profile
Pitching In
Choices and Options Down on the Farm
Eager or Not, Every Board Needs an M&A Strategy
Adapting to Survive
More Than Just a Drink
Operations
Payments
Small Business Lending
Human Resources
ABA Compliance Center Inbox
From the States
Corporate Social Responsibility
Index of Advertisers
From the Vault
ABA Banking Journal - November/December 2017 - Intro
ABA Banking Journal - November/December 2017 - ebelly1
ABA Banking Journal - November/December 2017 - ebelly2
ABA Banking Journal - November/December 2017 - cover1
ABA Banking Journal - November/December 2017 - cover2
ABA Banking Journal - November/December 2017 - 3
ABA Banking Journal - November/December 2017 - 4
ABA Banking Journal - November/December 2017 - 5
ABA Banking Journal - November/December 2017 - 6
ABA Banking Journal - November/December 2017 - 7
ABA Banking Journal - November/December 2017 - Chairman’s View
ABA Banking Journal - November/December 2017 - 9
ABA Banking Journal - November/December 2017 - Upfront
ABA Banking Journal - November/December 2017 - 11
ABA Banking Journal - November/December 2017 - 12
ABA Banking Journal - November/December 2017 - 13
ABA Banking Journal - November/December 2017 - 14
ABA Banking Journal - November/December 2017 - 15
ABA Banking Journal - November/December 2017 - Legal Briefs
ABA Banking Journal - November/December 2017 - 17
ABA Banking Journal - November/December 2017 - Economic Outlook
ABA Banking Journal - November/December 2017 - Power Up Profile
ABA Banking Journal - November/December 2017 - Pitching In
ABA Banking Journal - November/December 2017 - 21
ABA Banking Journal - November/December 2017 - 22
ABA Banking Journal - November/December 2017 - 23
ABA Banking Journal - November/December 2017 - 24
ABA Banking Journal - November/December 2017 - 25
ABA Banking Journal - November/December 2017 - Choices and Options Down on the Farm
ABA Banking Journal - November/December 2017 - 27
ABA Banking Journal - November/December 2017 - Eager or Not, Every Board Needs an M&A Strategy
ABA Banking Journal - November/December 2017 - 29
ABA Banking Journal - November/December 2017 - Adapting to Survive
ABA Banking Journal - November/December 2017 - 31
ABA Banking Journal - November/December 2017 - 32
ABA Banking Journal - November/December 2017 - 33
ABA Banking Journal - November/December 2017 - More Than Just a Drink
ABA Banking Journal - November/December 2017 - 35
ABA Banking Journal - November/December 2017 - Operations
ABA Banking Journal - November/December 2017 - 37
ABA Banking Journal - November/December 2017 - Payments
ABA Banking Journal - November/December 2017 - 39
ABA Banking Journal - November/December 2017 - Small Business Lending
ABA Banking Journal - November/December 2017 - 41
ABA Banking Journal - November/December 2017 - Human Resources
ABA Banking Journal - November/December 2017 - 43
ABA Banking Journal - November/December 2017 - 44
ABA Banking Journal - November/December 2017 - ABA Compliance Center Inbox
ABA Banking Journal - November/December 2017 - From the States
ABA Banking Journal - November/December 2017 - 47
ABA Banking Journal - November/December 2017 - Corporate Social Responsibility
ABA Banking Journal - November/December 2017 - Index of Advertisers
ABA Banking Journal - November/December 2017 - From the Vault
ABA Banking Journal - November/December 2017 - cover3
ABA Banking Journal - November/December 2017 - cover4
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