Boomerang crisis

Global borrowing: One crisis begets another. That’s one gloomy way to read the IMF's Global Financial Stability Report. While some nations are chipping away at their debt burdens, the mega-economies of the United States and Japan are making little fiscal progress. Overall, liabilities are transferring to governments, with little overall improvement on the global debt position. Another financial calamity, concentrated in government, still looms large.

The IMF is critical of Washington's failure to make progress on deficit reduction, pointing out that the United States is the only advanced economy (other than post-earthquake Japan) aiming for an increased deficit, after vectoring in cyclical factors, this year. The IMF estimates the fiscal burden from the US rescue of its banks at only 3.4 per cent of GDP, while Germany’s rescue cost 10.7 per cent of GDP. Yet in terms of GDP the US budget deficit is now four times Germany’s — a sign of fiscal profligacy.

Gross US government debt (including that held by the Social Security trust fund) has risen to 100 per cent of GDP, still below Japan, Ireland, Italy and Greece but above all the major European economies and the euro zone as a whole. However the primary US fiscal deficit is the largest of any country examined by the IMF and shows no sign of rapid reduction. This suggests the true cost of the 2009 stimulus. That $800 billion spending increase was passed in a few weeks, whereas a mere $38 billion reduction, mostly derived from accounting gimmicks, almost shut down the government.

American households are also in trouble, with gross debt far above most other countries. However financial institutions are in more trouble in the European Union, where gross debt for the euro zone is 148 per cent of GDP and for Britain an astounding 735 per cent of GDP. Non-financial corporations are in difficult straits in Japan and southern Europe, though even in the United States their overall debt-equity ratio is 105 per cent, a figure unimaginable 20 years ago.

The IMF believes that global financial stability has improved, but fails to account fully for the rise in real interest rates that must accompany its recommended shift away from macroeconomic and liquidity support. Unless inflation magically shrinks the current global burden of debt, the chances of a further financial crisis are still high.