Over the past 200 years, the top 6 countries in the World (accounting for 50% of World GDP) have endured 43 crises. In his new book, Richard Vague shows that they all share a similar cause: a rapid private debt accumulation and compromised credit standards in real estate. The importance of real estate lies in its scale. The US has $30 trillion private debt, compared to $20 trillion of government debt, and half of that is in real estate. Small adverse swings in debt valuations could therefore be catastrophic. Surprisingly, government debt levels tend to give counter-intuitive signals. For example, government debt in Spain in the run-up to the 2008 crisis actually improved by 13% as a share of GDP. Vague did find one factor that helped offset private debt risk: a significant current account surplus of at least 10% of GDP. As for today, he finds only small pockets of similar debt issues, largely in Asia, and he doesn’t see any major systemic threats for now. All his analysis and data is freely available at https://www.bankingcrisis.org/
Why does this matter? Since the 2008 global financial crisis and the 2012 European crisis, there’s been constant predictions of debt crises, but this provides some analytical thinking to identifying crisis factors. We need to watch real estate debt and current account balances, which make Asia look most vulnerable.
(The commentary contained in the above article does not constitute an offer or a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs.)
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