Economic optimists continue to discount any imminent recurrence of the 2008 financial crisis and recession; however, economic realists are far less positive about the long-term vitality of global finances.
Optimists will point to the institution of more regulation aimed at controlling what 10 years ago was charitably described as financial innovation. However, collateralized debt obligations based on mortgages that many people could not afford was more financial chicanery than innovation. But, while mortgage lending has been tightened up since 2008-09, economic realists need look no further than the runaway accumulation of debt around the world over the past 10 years as indication of a more fundamental risk to global financial integrity.
At home, Equifax numbers show consumer debt in Canada hit $1.9 trillion in 2018’s second quarter, and Statistics Canada notes that the country’s second-quarter household debt rose to 169.1% of disposable income.
Worldwide estimates peg the accumulation of debt at around US$72 trillion higher today than it was back in the year immediately prior to the onset of the Great Recession.
Especially concerning, aside from that colossal debt proliferation, is who is adding to it. According to McKinsey Global Institute partner Susan Lund, Chinese companies have racked up US$15 trillion in debt since 2007.
The Asian economic dynamo has become afflicted with the West’s spending-beyond-your-means disease. That is a significant reversal of basic economic values. Prior to the Great Recession, China had the world’s largest account surplus while the United States was the world’s biggest debtor.
Overall China’s debt has quadrupled since 2008, and, as it is in Canada, a lot of that debt is linked to real estate ownership and speculation.
Any widespread correction there would seriously exacerbate the market volatility created already by West-versus-East trade turmoil, and more than real estate bubbles would be bursting on both sides of the Pacific.
