Economic weather report: Global debt de-leveraging cannot be avoided

Watch on our video page here. Watch on YouTube here. Bernard Hickey delivers an Economic Weather Report in association with BNZ on the inevitability of de-leveraging of very high levels of debt globally. This is topical in the wake of Barack Obama's announcement of a US$1.6 trillion budget deficit this week, which could push America's public debt to GDP ratio to close to 100% once related liabilities are included. The United States has essentially delayed a day of reckoning over the last 18 months by transferring massive private sector debts to the public balance sheet and hoping it can skip through a recession without a big increase in interest rates and debt defaults. But all it has done shifted the required de-leveraging along rather removed it. America's total debt to GDP ratio is over 350% and will have to fall closer to its longer term average of 150% in the coming years if history is anything to go by. A similar spike in debt before the 1929 crash required more than a decade of de-leveraging, which meant lower consumption, more savings and a lower GDP growth rate. The chart below illustrates this perfectly. New Zealand is not immune from this inexorable pressure of de-leveraging. New Zealand's public sector foreign debt is low at 13% now, but our private foreign debt is high at 120% of GDP. Eventually, we too will have to save more and spend less, although our immediate situation is nowhere near as dire as America's. We are seeing this pressure of de-leveraging being applied through our banks, who are cutting lending to businesses and slowing lending growth to households to a trickle. This in turn has taken the steam out of the housing market.