A buildup of an unsustainable amount of debt generally precedes devastating deflationary episodes.
The last brush the world had with deflation was the 2007-2009 financial crisis, which was accompanied by a huge amount of bad debt in the mortgage market. That financial crisis was the most severe since the Great Depression of the early 1930s, which itself was preceded by a mountain of unsustainable debt.
As Robert Prechter’s Conquer the Crash says:
A high-debt situation becomes unsustainable when the rate of economic growth falls beneath the prevailing rate of interest on money owed and creditors refuse to underwrite the interest payments with more credit.
The signs show that the global financial system may be approaching a tipping point.
The United Kingdom is a case in point. Here’s a chart and commentary from our January 2021 Global Market Perspective:
[In the U.K.], the treasury took on another £31.6 billion in debt in November alone, 40% more than October, while public debt hit almost £2.1 trillion, or 99.5% of GDP, the highest ratio since 1962. Meanwhile, the deficit will widen to about £400 billion in 2020/21, or about 20% of GDP, according to the Office for National Statistics. That represents double the hit caused by the 2008 financial crisis. As we have been describing for most of the year, all of the puzzle pieces for the greatest financial crisis in history will soon be in place.
The U.K. is hardly the only place in the world where debt is reaching an alarming level.
Here’s what a Jan. 18 Wall Street Journal article says about the U.S.:
At 100.1% of gross domestic product, debt already exceeds the annual output of the economy, putting the U.S. in company with economies including Greece, Italy and Japan.
This headline is from the Toronto Star on Feb. 1:
Canada’s debt-to-GDP ratio is alarming.
The list of nation’s with troubling amounts of public debt goes on.
Our Global Market Perspective provides more insights on the potential for a historic financial crisis.
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