Despite five years of fiscal chastening, the debt load in the 11 economies that have been most closely watched has risen to a weighted average of 417 percent of gross domestic product from 381 percent in June 2007, Jamil Baz wrote in the Financial Times.
“In each of Canada, Germany, Greece, France, Ireland, Italy, Japan, Spain, Portugal, the U.K. and the U.S., the ratio of total (public and private) debt to gross domestic product is now higher than it was in 2007,” wrote Baz, chief investment strategist at GLG Partners, part of the Man Group Plc.
With the world “staggering under a mountain of debt,” Baz made five predictions: with deleveraging not yet begun, the crisis of the world economy has not started, either; it will take at least 15 years for the economy to reach “escape velocity”; the economic impact when real debt-cutting finally starts “will be massive”-- countries like the U.S. and Japan “stand to lose more than 20 percent of GDP against trend”; risky assets will perform badly for a long period.
Baz said the fifth point is that “there is no magic bullet.” Policy makers in the past could apply various instruments to ease the impact of debt stabilization measures, but in an era of low or zero interest rates, “such policy tools have lost effectiveness.”
“Virtue is not likely to be rewarded for a generation,” he wrote.
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