Housing Crisis Will Haunt Markets Until We Pay Up

27.10.2016 • Central Banks

From Merryn Somerset Webb – Moneyweek Magazine (Great Britain) –

Social progress has become synonymous with higher living standards. However, since the 1980s steady improvements in our living standards have been brought about largely by borrowing more.

Rising debt has helped to generate economic growth, by bringing forward spending that would normally have taken place over a period of years. Today, total borrowing by governments, households and non-financial corporations exceeds $160trn (around 230% of global GDP), triple the level of the early 1980s. Since 2008, total public and private debt in major economies has risen by more than $60trn, an increase of around 20 percentage points of GDP. Unfortunately, around 85% of the debt incurred in recent years has funded the purchase of existing assets or consumption, rather than being used for creating new businesses or productive purposes that build wealth. Consequently, total debt has grown at rates well above the corresponding rate of economic growth. This means that the credit intensity of the US economy has increased. Around $4-$5 of debt is needed today to generate each additional dollar of GDP, up from $1-$2 30 years ago.

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