The myth of austerity

The Geneva Report observes that the global economy is more awash in debt than during the financial crisis of 2008:

Contrary to widely held beliefs, the world has not yet begun to delever. Global debt-to-GDP is still growing, breaking new highs. Figure 1 shows the evolution of total debt (excluding the financial sector) for our global sample (advanced economies plus major emerging market economies). While there was a pause during 2008-09, the rise of the global debt-GDP ratio recommenced in 2010-2011.  Data in the report also show that debt-type external financing (leverage) continues to dominate equity-type financing (stock market capitalisation).

The chart they provide on global debt-to-GDP makes it perfectly clear how much worse the debt situation has gotten. There is actually 20 percent more global debt-to-GDP during this period of supposed “deleveraging” than there was when the crisis began.

There is definitely some funny business going on in the economic statistics. As you may know, I track the Fed’s L1 report, and I noticed an anomaly in the most recent report. Whereas the non-financial corporate credit sector was reported at an all-time high of $9.6 trillion in Q1-2014, in Q2 it rapidly declined to $7.4 trillion. But this decline was eliminated from the past data through historical revisions, thus hiding what would otherwise be a bigger decline in total credit market debt outstanding ($1,860 billion) than we saw from Q1-2009 through Q1-2010 ($948 billion).

This suggests that the inevitable transformation from credit disinflation to credit deflation may have already begun.