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This presentation analyses the report that has been published by the McKinsey Global Institute in 2011 and which is entitled "debt and Deleveraging". The presentation zooms in on the dramatic level and the dramatic increase of debt by governments, households, non-financial and financial companies in OECD countries. This evolution is then put into the broader perspective of post-war capitalism, which transformed into neoliberalism at the beginning of the eighties. Neoliberalism can only function by increasing the overall level of indebtness, which has now reached an unsustainable level. As a consequence capitalism has now entered a phase of a rapidely deepening crisis. The solutions proposed by McKinsey have a pseudo-scientific basis and fit perfectly into the obsolete neoliberal policies.
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skimminglight.netDebt and Deleveraging – A Critical Analysis
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A critical analysis of
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Content
● Who is McKinsey?● Leverage
– Aggregated
– Households
– Governments
– Companies
– Financial sector
– BRIC-countries
● Capitalism in crisis● Interest rates● 4 x Deleveraging● Empirical research● Proposed policy● Conclusions
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Who is McKinsey?
● World-wide management consulting firm, focussing at strategical issues of the top management
● Advises many companies, gevernments and institutions
● One of the most prestigious consulting firms in the world
● Delivered proportionally most CEOs to big companies
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AggregatedLeverage
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Some Smaller Countries● Iceland
– Debt +9*GDP in ['00-'08] to 1189% GDP ● Fin. sector 580% (aim: fin. hub)
● Ireland– Debt rose to over 700% GDP
● Fin. sector 421% (aim: fin. hub)
● Greece– Debt 230% GDP (110% government)– Speculators: ”economy Gr.?”
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Leverage Households
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Leverage Households
● Surging real estate prices– Stimulated high mortgages– Virtual wealth owners stimulated borrowing
● Growth GDP goes along with increased leverage – UK: '00-'08:
● GDP: +48%● Relative debt: +32%● Absolute debt: +47%
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LeverageGovernments
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Steady Levels of Leverage
● 2000-2008: “did not change much”● 2012: Situation drastically changed
– State intervention in companies● “Too big to fail”
– Surging unemployment– Surging interest rates– Recession– ....
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LeverageNon-financial
Companies
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Trends before crisis
● Most companies – Rising profits– Increasing equities– Decreasing debt/equity– Exceptions:
● Real estate ● Leveraged Buyout
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Trends before crisis
● Real estate– Rising debt/equity– Caused by
● Low interest rates● Quickly rising real estate prices
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Trends before crisis
● Leveraged buyout– Predator company borrows money– To acquire prey company– Debt moved to prey company– Prey company restructures
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LeverageFinancal Sector
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Conclusions
● Bigger share financial institutions in GDP– Leverage relatively more limited
● Shift deposits > loans – Drying up wholesale markt => banking crisis
● Increase leverage mainly in some countries– UK, US (Broker dealers), Spain
● Leverage not excessive – “did not exceed previous peaks” (around 1990)– “below historic levels”
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Leverage?
● Leverage
= assets/equity
= 1 + debts/equity
● Greek obligations, CDOs, ...● One sentence: “this suggests that ....
Equity => Leverage
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BRIC Countries
(1) Brazil, Russia, India & China
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Policy space
● OECD countries– = investments & market
● In theory– Some Keynesian measures
● In case of crisis – Fast rise of debt level
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Capitalismin
Crisis
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1917:6%
1929:16%
1946:121%
1981:32%
today: 101%
Gre-atDe-pres-sion
structural crisis of
capitalism
2008: 70%
Sources:treasurydirect.gov usdebtclock.orgusgovernmentspending.com
1941:39%
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What preceeded...
● Golden sixties– Low unemployment
● Seventies: High inflation– Caused by commoddities & wages– Result: decreasing investments
● Lower productivity growth
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Declining Gross Profit Share
Source: Capitalism Unleashed, Andrew Glyn, 2007, Oxford University Press
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The Offensive
● '79-'81: Volker (FED) raises interest rate– Slowing down demand – Rise unemployment (→ pressure wages)
● '81: Reagan axes 11.345 air traffic controllers
● '83: Mitterand changes policy● '85: Thatcher defeats mine workers ● '89: Fall Berlin wall
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Inflation & Real Wages Under Control
Source: Capitalism Unleashed, Andrew Glyn, 2007, Oxford University Press
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Rising Gross Profit Share
Source: Capitalism Unleashed, Andrew Glyn, 2007, Oxford University Press
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Rising unemployment
Source: Capitalism Unleashed, Andrew Glyn, 2007, Oxford University Press
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Structural crisis
● Starting around 1980– Rising profits at expense of wages– Housholds no longer able to buy all
produced goods– Leverage delayed crisis – Financial products more profitable
than real economy
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Higher debt=
Higher burden?
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Higher interest burden?● Government
– In difficulities → higher interest rates– Despite measures central banks– Recession/depreciation: Aggravate redeem
● Banks– Often “too big to fail”
● Households– Swept away in hype/bubble– Swept away in crisis
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Four waysof
Deleveraging
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Four ways of deleveraging
● Mass bankrupties● Austerity● High inflation● Outgrowing debt
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Mass Bankruptcies (1/3)
● Households– Sell properties, expropriations, ...– Poverty– Lenders → losses
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Mass Bankruptcies (2/3)
● Companies– Small: bankrupt
● Lenders → financial losses● Job losses
– Big: (temporarily) state support● Part burden to government● Reorganizations
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Mass Bankruptcies (3/3)
● Government– Revision of debt– Getting part of debt acquitted– Austerity program
● Lenders– Potentially insufficiently solvent to
cope with losses.– See previous slide
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Austerity (1/3)
● Expectations– Competitiveness – Export – Purchasing power
● But wold-wide cut-backs...– World market– Average competitiveness =– Export
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Austerity (2/3)
● Canada 1993-1997
– “Canada’s deleveraging episode provides a model for countries with highly indebted governments today. The key requirement was the political will to force through unpopular government spending cuts.“
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Austerity (3/3)
“If today’s economies were to follow this path, they would experience six to seven years of deleveraging, in which the debt-to-GDP ratio declines by around 25 percent. Deleveraging would begin two years after the start of the crisis, and GDP would contract for the first two to three years of deleveraging, and then start growing again.”
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Inflation
● Method – Money creation
● Effects– Value currency (Devaluation)– Real wages (aim: export )– Relative debt in own currency– Absolute debt in foreign currencies
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4 ways towards deleveraging
● Growth?– On the basis of
● Growing internal purchasing power?● Increasing export?
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Emprical Research
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Incorrect generalization based on non-representative sample
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45 cases of deleveraging
● 43 in [1969, 2008]– Period of world-wide economic growth– From '80: thanks to debt growth elsewhere
– Mostly one domain considered (e.g. government)
● UK 1947-1980– Golden age of capitalism
● US 1929-1943– '29-'33: Mass bankruptcies & rising debts %
– '34-'37: Austerity– '38-'43: Growth thanks to war
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Graph conflicts with other, publicly available data
See e.g. http://www.usgovernmentspending.com & http://www.treasurydirect.gov
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Behind the deleveraging
graph...
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ProposedPolicy
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1.“Policy makers should work toward developing an international system for tracking leverage at a granular sector level across countries and over time.”
2.“Bank executives should adjust their internal risk models to reflect leverage in sectors of the real economy.”
3.“Macroprudential policy should also reflect leverage in specific sectors of the real economy. “
4.“Financial regulators should reassess the need for further rapid increases in bank capital ratios.”
5.“Monetary policy makers should act to prevent pockets of leverage.”
6.“Tax preferences for debt, and especially for real estate lending, should be revisited.”
7.“Regulators should also revisit the broader set of incentives for households taking on debt”
Make borrowing more difficult!
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Conclusion
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Conclusion
● Ideological report● Answer needed
– Current situation● Systemic crisis● Addicted to cheap money● Limits reached● Deepening tensions
– Alternative● Socialize economy
