Few talked about signs of crisis, but many talk recovery

The word recovery in relation to the global economy has, rather unbelievably, been bandied about since early 2009, just a few months after the crisis actually began.

We have had a nascent recovery, a quickening recovery, a definite recovery and, more recently, signs of a faltering recovery.

If only we had paid such close and frequent attention to the indications of impending doom, no matter how insignificant they may have seemed, we might have been able to avoid this mess in the first place.

Almost nothing was said as the national debt of the United States sped past US$10 trillion (Dh36.73tn), there was hardly a word as Greece, Portugal and Spain continued to miss even the most basic fiscal requirements laid out in the Maastricht Treaty and silence as Wall Street packaged up the banking industry's combined effluent and sold it as gold. Not even the ratings agencies said anything.

But the world was happy as the debt piled up. The massive exercise in leveraging balance sheets, from the remotest of households to the most prominent of sovereign nations, opened up opportunity and prosperity like never before.

It is no wonder we have been looking so hard for signs of its return.

Despite the hopeful murmurs, recovery, at least on a multilateral scale, is still a long way off and it will remain so until we tackle the real problem at the root of this crisis.

Levels of debt have continued to rise at almost every level all over the world since 2008.

McKinsey & Company, the management consultants, had a close look at the levels of debt of 10 major economies just after the crisis began. McKinsey's report made for pretty grim reading.

It repeated the exercise just recently, and the results contain little that is encouraging.

Most worryingly, it appears that total debt has actually increased in every one of the world's 10 largest economies since 2008, mainly due to the continual increase in government debt. What's more, debt-to-GDP ratios have fallen only in three economies - the US, South Korea and Australia.

In fact, the US is the only country in McKinsey's top 10 that even appears to be following a recognisable path towards recovery.

Even there, the government is doing a pretty poor job of reining in debt, with the total national debt standing at $14tn today. It is hard to imagine that in 2001, after the end of the Clinton administration, the US was on track to pay off its national debt in its entirety and create a surplus of $2.3tn.

American households, on the other hand, are doing much better than their government. Total household debt in the US has decreased by some 15 per cent since 2008, but it is worth remembering that an awful lot of that has been written off by financial institutions as unrecoverable, most of it mortgages on foreclosed homes.

Their British counterparts have actually increased personal debt, in virtual lockstep with their government.

The kind of austerity policies being pursued in Britain, and in those European countries in peril, are unlikely to enable the kind of deleveraging needed to truly enter recovery. Adair Turner, the head of Britain's financial regulator, the FSA, underscored this last week when he cautioned that such policy leads to the denominator of GDP chasing the numerator of debt in a downward spiral - exactly what McKinsey's analysis shows is happening in Britain.

Deleveraging is a critical phase of recovery. With this in mind, we can safely say that the US is at best in remission, but the rest of the world is still very much on the sick list.

For this most virulent of illnesses, a return to the kind of surplus aspirations we had in the early part of the century is perhaps the only cure.

jdoran@thenational.ae

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