Global debt by households, governments and non-financial enterprises has mushroomed by some $30 trillion since 2007, but governments in advanced economies are not taking advantage of the flood of cheap money to carry out necessary structural reforms that will pay off over time, warned the BIS.
Sharpening the Bank for International Settlement’s (BIS) frequent warnings about the danger of the seemingly endless appetite for debt, its economic adviser, Stephen Cecchetti, said he was concerned because buoyant financial markets have become disconnected from economic fundamentals and dependent on easy policy by central banks.
While it is positive that central bank policies have reduced tail risks, especially in the euro area, loose fiscal and central bank policies are not a substitute for structural reform, and Cecchetti is sceptical about the effect of further policy easing as debt levels are high and continuing to grow.
“Combining households, non-financial enterprises and government since 2007, global debt has risen a combined $30 trillion dollars, or roughly 40 percent of global GDP, “ Cecchetti told journalists in connection with the publication of BIS’ March quarterly review.
“One reason to be sceptical about the efficacy of further monetary or fiscal easing is that debt levels are very high and continue to rise,” he said, adding: “It is telling that as asset prices are rallying and firms are issuing more debt, investment in the major advanced economies is not picking up."
Regardless of economic or political persuasion, it is clear that economic growth is driven by investment and this is financed through borrowing, either by governments or the private sector.
But households are overburdened, firms are hoarding cash, and governments have reached their borrowing limits. No one wants to borrow more, nor should they, Cechetti said.
With monetary and fiscal policies reaching their limits, Cecchetti appealed to policy makers to get busy with structural reform, such as addressing the time bomb in the pension and healthcare systems and reducing barriers to the reallocation of capital or workers across sectors.
“Increasing public and private debt ever further until we are not able to fund it is not a substitute for these reforms,” he said.