'The alternative to growing out of debt is to reduce the outstanding stock of debt.'<blockquote>'Accommodative monetary policy has had an ambiguous impact on the adjustment to lower debt ratios. It has supported adjustment to the extent that it has succeeded in stimulating output, raising income and hence providing economic agents with the resources to pay back debt and save. But record low interest rates have also allowed borrowers to service debt stocks that would be unsustainable in more normal interest rate conditions, and lenders to evergreen such debt. This tends to delay necessary debt adjustments and result in a high outstanding stock of debt, which in turn can slow growth.
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Regardless of the risk of serious financial distress, in the years ahead many economies will face headwinds as outstanding debt adjusts to more sustainable long-run levels. Determining the exact level of sustainable debt is difficult, but several indicators suggest that current levels of private sector indebtedness are still too high.
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In all but a handful of countries, bringing debt service ratios back to historical norms would require substantial reductions in credit-to-GDP ratios. Even at the current unusually low interest rates, credit-to-GDP ratios would have to be roughly 15 percentage points lower on average for debt service ratios to be at their historical norms. And if lending rates were to rise by 250 basis points, in line with the 2004 tightening episode, the necessary reductions in credit-to-GDP ratios would swell to over 25 percentage points on average. In China, credit-to-GDP ratios would have to fall by more than 60 percentage points. Even the United Kingdom and the United States would need to reduce credit-to-GDP ratios by around 20 percentage points, despite having debt service ratios in line with long-term averages at current interest rates.
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The alternative to growing out of debt is to reduce the outstanding stock of debt. This happens when the amortisation rate exceeds the take-up of new loans. This is a natural and important channel of adjustment, but may not be enough. In some cases, unsustainable debt burdens have to be tackled directly, through writedowns. Admittedly, this means that somebody has to bear the ensuing losses, but experience shows that such an approach may be less painful than the alternatives. For example, the Nordic countries addressed their high and unsustainable debt levels after the banking crises of the early 1990s by forcing banks to recognise losses and deal decisively with bad assets.
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The conclusion is simple: low interest rates do not solve the problem of high debt. They may keep service costs low for some time, but by encouraging rather than discouraging the accumulation of debt they amplify the effect of the eventual normalisation. Avoiding the debt trap requires policies that encourage the orderly running-down of debt through balance sheet repair and, above all, raise the long- run growth prospects of the economy. [page 83, <a href="[
www.bis.org];]'
- BIS,
84th BIS Annual Report, 2013/2014, (
BIS Slams the Fed; Ridiculous Question of the Day: "Is The Fed Going To Attempt A Controlled Collapse?" July 11, 2014)</blockquote>
Context<blockquote>
Janet Yellen Chimes in on the Bubble Question, July 10, 2014
Global Debt Ponzi, 2014
(Banking Reform - English/Dutch) '..a truly stable financial and monetary system for the twenty-first century..'</blockquote>