Wiesbaden, March 1st 2018. The global debt is still rising and has reached unprecedented levels. The debt levels are not sustainable and will result in lower demand in the future. Companies need to take proactive countermeasures.
Everyone knows the Black Thursday of 1929, which kicked off the biggest global depression seen so far. Unemployment rose to levels of 20-30%, companies went out of business and general trust in capitalism diminished. The System collapsed. Can this happen ever again ?
Nobody knows, but the current global situation is not very promising. The public debt to GDP ratio of the world’s most influencing economy – the US – is at over 105% and rising. When considering future liabilities such as state pensions and adding the private and company debt, estimates vary even between 300% and 350% of debt to GDP. The American sky scraping consumption is paid by debt.
China’s debt is less transparent, but estimates range between 200% and 300% for the overall debt to GDP ratio. The brand new infrastructure and the real estate boom are paid by debt. In Europe, the situation is similar. The extremely luxury welfare state is paid by debt.
Debt has to be paid back or the debtor has to default or it has to be devalued by inflation.
Accumulating debt provides today additional opportunities to spend more than current income and these opportunities are transformed into consumption such as cars in the US, bridges in China and social welfare in Europe. Therefore, if the debt is paid back, then consumption has to decrease not only by the additional opportunities but also by the back payments. Demand shrinks and prices fall. A recession might arise.
The debt of one object is the wealth of somebody else. If the debtor defaults, then someone losses money. A major write off results in major negative wealth effects and leads to shrinking demand and increased uncertainty as people and banks are unwilling to lend money. A recession might arise.
Inflation is the favoured option of the central banks. If the prices rise faster than the interest rate, then real value of the debt is shrinking. Assuming the lenders accept their loss, then this strategy works. In fact, this is how the FED got rid of its debt after the World War II. However, it was only successful by regulating the market and forcing institutions to buy government bonds, which yielded lower than the inflation rate. Today the central banks try to push inflation on the global scale since 2009 by increasing the money supply to unprecedented levels (hence, increasing debt), but inflation continues weak.
What happens if inflation increases ? As the markets are not regulated, investors will refuse to lose money when buying government bonds. The price for money (the interest rate) has to rise. As rising interest rates increase the back payments of debt and hence defaults or shrinking demand and as they also cause a negative effect on the stock market, this scenario is extremely dangerous in today’s world of debt. A recession might arise.
External shocks, which might unsettle consumer and businesses, could pop up any time: Italian elections, Middle East issues, loss of confidence in the US Dollar, so called currency wars, etc.
The outlined scenarios may result in a recession or may develop through vicious feedback loops into a bigger crisis.
Four outcomes are possible:
1. Local turbulences as local banks default2. A normal recession with negative growth in 2 or 3 quarters.
3. A major crisis with central banks able to contain the crisis – as in 2009.
4. A major crisis where the central banks are not able to contain the crisis immediately
Successful company management searches for and realises business opportunities while being aware of the risks. As long as the risks are known and countermeasures are immediately taken if they pop up, the effect of the risks can be reduced.
Is your company prepared for the scenarios ?
Has your company a back up plan for these scenarios ?
What has your company learned from the 2008/2009 crises ?
Thorsten Schuppenhauer – k3 managing director – stays positive “crisis come and go. The better a company is prepared for the next crisis, the more successful it will be able to exploit all its opportunities.
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