Following are excerpts (edited for brevity) from
a Washington Post article by Robert J. Samuelson regarding the very high levels of international debt and the possible results of that intersecting with a general turn-down in world trade.
The untold story of the world economy — so far at least — is the potentially explosive interaction between the spreading trade war and the overhang of global debt, estimated at a staggering $247 trillion. That’s “trillion” with a “t.” The numbers are so large as to be almost incomprehensible.
Households, businesses and governments borrow on the assumption that they will service their debts either by paying the principal and interest or by rolling over the debts into new loans. But this works only if incomes grow fast enough to make the debts bearable or to justify new loans.
Here’s where the trade war and debt may intersect disastrously. Since 2003, global debt has soared. As a share of the world economy (gross domestic product), the increase went from 248 percent of GDP to 318 percent. The figures include all major countries and most types of debt: consumer, business and government.
To service these debts requires rising incomes, [but] an expanding trade war threatens to squeeze incomes. At best, this could slow the global economy. At worst, it could trigger another financial crisis. Note that the danger is worldwide, not specific to the United States. We’re approaching a turning point: If debt growth is not sustainable, new lending will slow or stop. Borrowers will have to devote more of their cash flow to servicing existing debts.
This may represent a final chapter to the financial crisis. The low interest rates adopted by central banks were justified as necessary to avoid a worldwide depression. Critics worried that cheap credit would rationalize risky lending that couldn’t survive higher rates. We may soon discover who’s right.Robert J. Samuelson is a conservative journalist for The Washington Post, where he has written about business and economic issues since 1977. He was a columnist for Newsweek magazine from 1984 to 2011.
Comments
I argued the opposite: that the Keynesian prescribed actions then being taken by Fed president Ben Bernanke, followed by Janet Yellin, were well worth pursuing in an attempt to avoid a replay of the Great Depression.
Perhaps the last shoe has yet to fall, and as Mr Samuelson observes, "We may soon discover who’s right."
"The untold story of the world economy — so far at least — is the potentially explosive interaction between the spreading trade war and the overhang of global debt"
2) Ted's recent post:
"Foreign Investment In The United States plunged 32% In 2017"
Whirlpool Wanted Washer Tariffs. It Wasn’t Ready for a Trade Showdown.
After the Trump administration announced new tariffs on imported washing machines in January, Marc Bitzer, the chief executive of Whirlpool Corp., celebrated his win over South Korean competitors LG Electronics Inc. and Samsung Electronics Co.
“This is, without any doubt, a positive catalyst for Whirlpool,” he said on an investor conference call.
Nearly six months later, the company’s share price is down 15%. One factor is a separate set of tariffs on steel and aluminum, imposed by the U.S. in March and later expanded, that helped drive up Whirlpool’s raw-materials costs. Net income, even with the added benefit of a lower tax bill, was down $64 million in the first quarter compared with a year earlier.
Appliance prices have risen for consumers, and there are signs of waning demand.
I forget whether that was in the past or is true currently.
@VintageFreak- I was reminded of your question by an article in this morning's WSJ:
The Dark Side to Rising Consumer Spending
Revised sales figures also suggest that people are socking away less money than previously reported. And as they save less, people are borrowing more. Last week, the Federal Reserve reported that consumer credit outstanding rose by $24.6 billion in May from a month earlier, nearly double the $12.8 billion economists expected to see.
At Bank of America and JPMorgan Chase total loans at their consumer units each rose by 7% from a year earlier, led by credit cards and residential mortgages.
In a healthy economy consumers’ increased use of debt won’t cause any immediate problems, but it does call into question how long the spending gains are likely to persist. There are two possible explanations for the borrowing: With job growth strong and unemployment low, many people are pulling spending forward with the expectation their paychecks will get bigger and they will be able to pay off the loans.
The other is that consumers, who haven’t yet seen big pay increases, are borrowing to maintain their standards of living as inflation picks up.
Note: The above excerpts quoted from the Wall Street Journal have been edited for brevity. Emphasis was added.