FT’s Kate Mackenzie writes: Morgan Stanley cross-asset strategist Gerard Minack says the remarkable thing about developed economy deleveraging is how little of it has happened:
The credit super-cycle ended four years ago, but leverage has hardly fallen in major economies: debt-to-GDP ratios remain historically high.
Minack says the problem is some of that deleveraging (particularly for households) is being tackled by saving more, but that won’t solve the problem, or at least not very quickly. This is because of what the borrowings were used to finance: mostly pre-existing assets (that were forecast to rise in value) rather than expenditure.
There is a simple reason why deleveraging is taking so long: governments are borrowing money (deficit-spending) to offset private sector deleveraging and avert a deflationary spiral. So overall (non-financial) debt to GDP ratios, which include government debt, are almost unchanged.
That is not necessarily a bad thing — unless you would prefer a 1930s-style 50% drop in GDP after a deflationary spiral. What can be destructive is funding government deficits from offshore because you eventually have to pay the money back. Far better to borrow from yourself — in other words your “independent” central bank. That way you never have to pay it back.
As for canceling central bank holdings of government debt. Why bother? Interest payments made on the debt go right back to the Treasury as central bank profit distributions. And why set a precedent? I doubt many would believe government promises that this was a once-off and would never be repeated…….until next time.
via How cancelling central banks’ holdings of government debt could be a useful thing | FT Alphaville.