Capital markets and signs of strain

Capital markets and signs of strain

The world’s debt is rising and slowdown is not predictable. Should we be alarmed?

By Oso Oseguera, Editor in Chief at Chief Executive Officer (Latam & North America)

While politicians and the general public have seemingly lost interest, capital markets are beginning to show signs of strain, financial experts say.

Global debt surged by $7.5 trillion in the first half of the year, hitting a new record of more than $250 trillion, according to data released last week from the Institute of International Finance (IIF).

The world’s debt has now risen to 320% of what it produces, the highest level ever recorded — and IIF economists say they see “no sign of a slowdown.” They expect the global debt load to exceed $255 trillion by the end of the year. The US budget deficit rose 34% in October from a year earlier, and the US and China are leading the debt binge with more than 60% of the world’s total, the IIF notes.

US government debt auctions this year have been strained. The systemically important repo market that banks use for cash buckled in September, necessitating hundreds of billions of dollars of cash infusions from the Fed. The government is exploring reintroducing 50- and 100-year bonds to alleviate stress in the debt markets.

While these are hardly mainstream economic indicators, the recent troubles in US capital markets “may be an early warning of a digestion problem,” Catherine L. Mann, global chief economist at Citi, said during last month’s National Association for Business Economics meeting.

“This is the longest expansion in history, but it is also the weakest and part of that is the extremely high debt,” said Liz Ann Sonders, chief investment strategist at Charles Schwab. “The effect may be a subtle crisis over time, like we have seen with just a depressing pressure on growth.”

Even Fed chair Jerome Powell, who has been consistently upbeat and focused almost exclusively on the strengths of the US economy, was dour in his assessment of current US debt levels.

“The federal budget is on an unsustainable path, with high and rising debt,” Powell told the Joint Economic Committee Wednesday. “Over time, this outlook could restrain fiscal policymakers’ willingness or ability to support economic activity during a downturn.”

“I remain concerned that high and rising federal debt can, in the longer term, restrain private investment and, thereby, reduce productivity and overall economic growth,” he added.


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John Bärr
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