We are beginning a new series of articles. One of the problems with the mainstream media is that they do not give the reader a good sense of what is really going on in the global financial markets. Websites have popped up that have become a source to showcasing what is really going on underneath the surface. One of those websites is Zerohedge. Zerohedge's goal is to illuminate some of the shenanigans that are going on in the financial markets. However, it is an extremely negatively biased website. The goal of our series is to discern between articles that make a good point and articles that are biased and not 100% factual. Our first article is about the end of the global debt super cycle.
We base our analysis using data gathered by the Bank of International Settlements (BIS). The BIS publishes data on total credit to the non-financial sector. According to the data, total global debt (or credit), excluding financials, has grown 13.38% from the end of 2010 to the end of the third quarter 2015, which is slightly above 2% on an annual basis. From the end of 2002 to the end of 2007 global debt increased on average by 10% per year. The upshot here is that global debt, excluding financials, has not grown at an outrageous pace since the end of 2010. However, total global debt never declined significantly since the 2008 financial crisis, except in March of 2009. But there does appear to be some deleveraging going on as of September 30, 2015. From June 30, 2014 to September 30, 2015, global debt has decreased by 5%. Total debt excluding financials has been declining every quarter during that time frame. Therefore, it appears the global economy is starting to deleverage.
Figure 1: Global Debt (2001-2015)
We find that there exists a difference in debt growth between advanced and emerging market economies since the global financial crisis.
Figure 2: Emerging vs. Advanced Economy Growth Rate (2006-2010)
From 2006 to the end of 2010, emerging market debt excluding financials grew 138% whereas advanced economy debt growth grew 43%. Global debt growth is perfectly fine as long as the economy is growing at a similar pace. From 2010 to 2015 global debt relative to GDP grew 15% for both the emerging and advanced economies.
From 2010 to 2015 we see a different story.
Figure 3: Emerging vs. Advanced Economy Growth Rate (2011-2015)
Emerging economy debt grew 60% from 2011 to 2015; however, advanced economy debt barely grew during that time period. Debt to GDP grew to 24% for the emerging economies and fell 1.5% for the advanced economies.
The economy where debt grew the most was China. From 2010 to the end of the third quarter 2015, China's total debt excluding financials has increased 124%. Yes, it has more than doubled. This is not anything abnormal for China. Total debt has basically doubled every five years since 1995. China's total debt is still growing; however, it is growing at a slower pace. On average China's total debt excluding financials has grown at 20% per year. As of the third quarter 2015 total debt growth is running at 10% per year. China debt relative to GDP has also grown to a worrisome level. It is now 250% of GDP.
Is debt growing at a level that may result in a Great Depression? The answer is no. Advanced economies have decreased the amount of debt and debt to GDP levels, not including financials, are at stable levels. In addition, interest rates are low making that debt easier to service. Things are not so out of whack. However, there is some concern regarding the debt situation among the emerging economies, most notably China. China has loaded up on debt and it appears to becoming unsustainable based on the debt relative to GDP. Other emerging markets are following suit, such as Saudi Arabia and Argentina. The Zerohedge article does place reason for concern. However, it is not as dire as the article states. As investors, we worry about the next crisis emanating from China and the emerging economies. Staying invested in the US has been a good investment and we believe it will continue to be one.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.