This is the title of a new report from McKinsey & Company on global debt. So far, things are playing out pretty much like Ken Rogoff and Carmen Reinhart suggested they would. To wit:
…major economies have only just begun deleveraging. In only three of the largest mature economies—the United States, Australia, and South Korea—has the ratio of total debt relative to GDP fallen. The private sector leads in debt reduction, and government debt has continued to rise, due to recession. However, history shows that, under the right conditions, private-sector deleveraging leads to renewed economic growth and then public-sector debt reduction.
In many countries, debt is still growing. In a few, debt has gone down in the private sector (corporations and individuals), mostly offset by rising debt in the government sector. The good news is that the public sector debt may start to drop when the economy begins to grow.
The Economist has some nice graphics from the McKinsey study. It’s very interactive and allows you to see what happened around the world over time. And they make a good point about debt and wealth:
Wealth ebbs away a lot faster than debt. Our interactive guide shows levels of debt as a % of GDP for a selection of rich countries and emerging markets. With a few exceptions, such as Germany and Japan, most rich countries saw a huge rise in debt levels in the years running up to the crisis. Unwinding these dues will take a lot longer. In many rich countries the process of debt reduction hasn’t even started.
I added the bold. It will take some spending restraint and renewed economic growth to start to pare the debt burdens. By the way, this is true on an individual level as well as a national level! When asset values implode, the debt remains.
It’s too early to tell if the US market has turned the corner and will pay more attention to growth than debt going forward. There are still a lot of things up in the air in Europe and in domestic politics. Once again, relative strength may be the best option for sorting out what assets are going to perform over time.