Global Economy: The Markets' Worst Kept Secret - by James Gruber

Here’s what your stockbroker and the media aren’t telling you: the world is more indebted now than it was at the height of the financial bubble in 2007. That’s right. Despite the extraordinary government intervention of the past six years. Despite continuing optimism of a recovery. Despite the reassuring words of central bankers. We’re worse off in debt terms.

From this, there are several inevitable conclusions that will be discussed in depth in this piece:

1) The policies pursued since the financial crisis haven’t worked. Otherwise, debt to GDP ratios would be decreasing, not increasing.

2) Interest rates can’t rise above GDP rates, otherwise debt to GDP ratios will climb further. If they do, you can expect more money printing, budget cuts and tax rises.

3) That means low interest rates are likely to stay for many, many years. It’s the only way to bring the debt down to more sustainable levels.

4) The startling thing about the past six years is the almost total lack of reform to fix the problems which led to the 2008 debt bust. It’s ironic that a paragon of communism, China, may well be the one to soon lead the way on substantive capitalist reforms.

5) Emerging markets, including my neighbourhood of Asia, may be better off than the developed world when it comes to debt, but rising asset and commodity prices have papered over several problems. And these problems are now coming to light.

6) Debt crises happen because incomes can’t support the servicing of the debt any longer. If there is any drop-off in economic growth, a 2008 re-run could well be around the corner. That’s not trying to be dramatic; it’s just the way the math pans out.

Read more: The Markets' Worst Kept Secret - Forbes