In Figures: Will the debt bubble burst?

Consumption significantly outstrips national growth levels in the West and the global trend is of falling savings - what will happen if US interest rates rise sharply?

by Julius Sen, an associate director at the London School of Economics
Last Updated: 23 Jul 2013


Consumers in the US and other countries are spending more than they earn and running up high levels of personal debt. The trend has been fuelled by low interest rates, growing wealth and credit liberalisation. These high-spending habits are often mirrored at a national level where many governments run major current account deficits. At one level, this orgy of spending is driving global growth, which has risen from 3.2% in 1970 to over 4% today, by maintaining high demand for goods and services. But consumption so significantly exceeds national growth levels that there are serious doubts about its sustainability.


Despite the stereotype of credit card-crazy consumers, much of the increase in household borrowing has been against property, which, since prices have generally risen, has largely proved a sensible 'investment'. Household wealth has increased as both property and share prices have soared, even as savings have fallen. Similarly, the conventional economic wisdom that a high rate of domestic saving leads to higher economic growth in a country (savings providing the investment needed for growth) is open to question - at least in the rich West. Countries such as the US and - to an extent - the UK have recorded high economic growth rates with low household saving rates, while others with low growth rates, such as France and Germany, have high saving rates. By contrast, high-growth China and India, with high national saving rates of 37% and 26% of GDP respectively, appear to conform to traditional growth theory, which may reflect their lack of full currency convertibility and therefore their greater dependence on domestic savings.


The global trend is of falling savings even as economic growth has strengthened - partly explained by improving technology and productivity, meaning less money is needed to produce growth, particularly in service-based industries. Industrial economies are generally characterised by reduced saving rates and occasionally high current account deficits, while emerging countries, as well as oil and commodity exporters, run major current account surpluses and are saving more. These surpluses are effectively recycled to help sustain the high consumption of the West (as well as being used to expand local consumption). The money is lent back through the purchase of, primarily, dollar assets.


Financial services firms have been the principal beneficiaries of rising global borrowing and the recycling of money through global capital markets. The industry earns in a number of ways, from matching borrowers and lenders to operating banking and payment systems, and providing advice and support services. Companies generally no longer need household savings to support investment, and high global growth and high profits also mean that the world is awash with money and borrowing is relatively cheap. The booming oil, gas and other extractive industries have benefited in particular from this cheap money.


The US is central to the global economy and its performance has a spill-over effect on the rest of the world. Scenarios that could tip the world into economic crisis include a sharp rise in US interest rates to curb domestic inflation, leading to a crisis in mortgage repayments and a crash in the US housing market; or a drying up of external funding for the US deficit, causing a sharp rise in interest rates with economic contraction limiting its fiscal deficit. US interest rate increases would have a direct impact on the global economy because of the centrality of the dollar to trade and investment activity. Property and stocks are overvalued around the world and there are concerns that the Asian financial crisis of 1997 could be repeated in countries such as India. A major change in US interest rates, energy prices, and global property and asset values could destabilise current growth patterns and precipitate a rethinking of business and investment strategies. The key losers would be manufacturing - except minerals and primary commodity processing - and the key winners financial services and high-end services.


Liabilities outstanding as a percentage of nominal disposable income, 1993-2004


Projected real GDP growth rate 2006 against household savings as a percentage of GDP 2005.

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