Increased risk of debt deflation – deflation – News Couple

Increased risk of debt deflation – deflation

The burden of private sector debt continues to grow.

The explosion in debt since the early 1970s, when advanced economies finally ended all currency links to gold, has been the source of much of the doom trade since the 1980s. An entire industry predicting economic Armageddon sprang up when the debt bubble burst. However, the debt bubble continued to grow and grow.

Some are now wondering if it’s even a bubble. They say that religion is a normal part of life. We can’t get through our lives without incurring some debt, like a mortgage, and businesses can’t expand without borrowing. This is correct. Religion should not be a problem in the natural course of events. The issue becomes a problem when the debt becomes excessive. The trillion dollar question is, of course, how to define excessive.

One way is to look at the level of debt in relation to your income. On a macroeconomic scale that might involve looking at debt as a percentage of GDP. Another important element in examining the total debt is its division into the public and private sectors. Public sector debt is much less important than private sector debt because, in most cases, governments can postpone the day of reckoning and constantly abandon the enclosure. The private sector does not have this luxury.

Japan’s private (non-financial) sector debt ballooned from 150% of GDP in 1981 to 210% at the end of 1989, according to Bank for International Settlements (BIS) data. Then, as the social mood turned negative, sending the stock market down, it returned to 160% by 2007, accompanying the Japanese economy’s downturn.

There are many ways to segment debt statistics. Using the same BIS data, private (non-financial) sector debt in the USA is currently hovering around 165% of GDP. This is well below the maximum reached by Japan in 1989, but comparable to the record high for the United States in 2007, just before the Great Financial Crisis of 2008.

Taking private sector debt as a whole, updated data from the Organization for Economic Co-operation and Development (OECD) reveals that private sector debt in the United States has ballooned from 184% in 1999 to 243% in 2020.

You can choose, but, by any measure, the level of private sector debt in the United States is high. However, is it a problem?

Private sector debt only becomes a problem when the social mood becomes negative, as was the case with Japan. How do we know when a social mood turns into a negative state? When the stock market develops a downtrend. Then, and only then, the merchants of death would finally spend their day in the sun.

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