Waves of Debt Hitting the Global Economy

Waves of Debt Hitting the Global Economy


“Debt, n. An ingenious substitute for the chain and
whip of the slavedriver.” ~ Ambrose Bierce The World Bank released a report last week
titled, “Global Waves of Debt, Causes and Consequences”, which discusses the four
waves of debt that have rocked the world over the last 50 years. The first three ended in disaster — the
Latin American debt crisis of the 1980s, the Asian financial crisis of the late 1990s,
and the global financial crisis of 2007–08. We are currently in the fourth wave of debt
which started around 2010 and reached an all-time high of 230% of GDP in 2018. The rapid rise in debt is particularly telling
in emerging markets and developing economies. This latest debt wave has already witnessed
the largest, fastest and most broad-based increase in debt in these emerging economies,
with their total debt having risen by 54 percentage points of GDP to a historic peak of almost
170% of GDP in 2018. Despite their very fast debt buildup, emerging
market growth has slowed significantly. Increased debt has not resulted in the healthy
economies they were hoping for. Unsurprisingly, the first three debt waves
began during periods of low interest rates and ended with widespread financial crises,
global recessions, and downturns. These waves were typically facilitated by
financial innovations or changes in financial markets that promoted one thing — borrowing. And that’s what we’re seeing right now. Getting into debt is easy. With the rise of buy now, pay later apps,
it’s never been easier to get into debt. People have called these services “revolutionary”
and a “game changer”, but I have one word for them — “stupid”. The world’s just getting itself into more
and more financial trouble. ASIC commissioned a review into these services
late last year and basically found that they are essentially credit cards on steroids. Whereas with credit cards, there would be
a lengthy application process where you must list your existing debts and prove your ability
to repay outstanding amounts, these buy now pay later services seem to throw responsible
lending out the window. Most of their users are young people who are
not on very high salaries. Many of them are students and only work part-time. More than half of users are spending more
than they normally would, with 1 in 6 becoming overdrawn or having to borrow additional money. Roughly 1 in 10 Australians are using these
apps now, so it’s no surprise that more and more merchants are offering them — to
be fair, they probably feel like they have to. This case study on ASIC’s MoneySmart website
shows how easy things can get out of hand, “In the lead-up to Christmas, Mai decided
to take advantage of some markdowns by buying a couple of items online. She found a new pair of designer sneakers
worth $150. As Mai was a bit tight on money, she signed
up to a buy now pay later service to split her repayments. She then found a hair straightener at a reduced
price of $300 at another online store. Mai used a different buy now pay later service
to buy the hair straightener and stretch out her repayments. A fortnight later, Mai discovered that her
bank account was overdrawn. She then realised she had not checked before
buying the items if she would have enough money in her account to make both repayments. Mai was not only charged default fees by both
buy now pay later providers, but her bank also charged her an overdrawn fee.” But it’s not just buy now, pay later. Sometimes people need cold, hard cash. Never fear, there’s apps for that too! Basically, you just jump online, select how
much cash you need, and you’ll get YOUR money in one hour. I like how they use the word “your”. Before you know it, you’ll be up to YOUR
eyeballs in YOUR debt! The World Bank’s report said that the latest
wave of debt is more challenging than the previous three waves because of the build
up of both private and public debt. There’s also a big rise in borrowing, which
is at the global level and not just limited to one or two regions. World Bank President, David Malpass, commented
on the latest findings, “The size, speed, and breadth of the latest
debt wave should concern us all. It underscores why debt management and transparency
need to be top priorities for policymakers. Emerging and developing economies already
are more vulnerable on a variety of fronts than they were ahead of the last crisis. 75% of them now have budget deficits, their
foreign currency denominated corporate debt is significantly higher, and their current
account deficits are four times as large as they were in 2007. Under these circumstances, a sudden rise in
risk premiums could precipitate a financial crisis, as has happened many times in the
past.” The World Bank’s Vice President for Equitable
Growth, Finance and Institutions, Ceyla Pazarbasioglu, kept her comments short and sweet. She said, “History shows that large debt surges often
coincide with financial crises in developing countries, at great cost to the population.” Ah yes, dear listener, despite all the warning
signs and the historical catastrophes, we’re letting ourselves get into massive debt again. It seems like we never learn. We praise services like AfterPay as strokes
of genius, but yet, I think we all know the end result. A population that is becoming more and more
indebted until one day in the not-to-distant future, it will all come crashing down.

8 thoughts on “Waves of Debt Hitting the Global Economy

  1. Its like Alcohol everyone is encouraged to drink, and everyone is encouraged to use credit, smart ones understand there is a limit most dont

  2. Well.. the problem with such low interest rate is that it inflates the asset class, and inter- lending becomes a problem due to the inflated and insecure collateral hence repo interest rates goes well above the official rates..at the end, no banks want to take on CDOs which freeze up the circulation inevitably collapse the pillar of the financial market.. it is not whether it happens, it is when it happens.

  3. 1 in 10… Bloody hell, did not think it was that bad. More people need to hear about just how bad these schemes are.

  4. As I, m watching this ( 12.15pm E.A.T) there is a news story on win tv talking about the dangers of afterpay and the like
    synchronicity?

  5. I don’t feel sorry for all these β€œI want it now” ultimately they will learn the hard way and some will never learn.

  6. The prophet Mohammed said that the malhamma or Armageddon for the Christians will come when everyone is consumed by Riba "debt".

  7. It's important to differentiate between debt for things that depreciate and and debt for assets that appreciate. Borrowing money for appreciating assets has never been more appealing.

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