Getting rid of one’s debt is not as easy as it may appear (especially when it’s about an entire society). Actually, it’s a very slow process. Why? Because everybody is trying to do it at the same time - the government, the private sector and many households. This causes a decrease of the consumption and in the demand. And of course, the growth of the economy slows down (a lot). Usually, these periods last around 10 years. We are currently living in a “lost decade”!
According to a research in the US, the biggest job losses since the start of the recession in 2008 were caused by the decrease of the consumption level. Because of that, the private sector dismissed a large number of employees. Back in 1982 the US consumption of goods, services and properties was 67% of GDP. In 2007 it was 74%. This occurred thanks to the credit boom stimulated by the low interest rates of the Federal Reserve. The rise of the gross debt between 1995 and 2007 was higher than the entire debt of the US in its first 212 years of existence. The household debt was around 100% in the year 2000 and it went up to 133% in 2007. In 1938 the public spendings were 15% of GDP. They reached 36% in 2010. The public debt of the USA is currently 103% of GDP.
Europe is not far behind. According to the consulting agency McKinsey, in 2010 the overall level of the debt (public and private) was 446% of GDP of the UK, 336% of Spain, 322% of France, 315% of Italy and 296% of the USA. McKinsey observed 10 different economies and the average debt level was around 200% of GDP in 1995. It went up to 300% in 2008. In the developing countries, the figure is 30% on average. In 2007 each worker from the developed countries had a debt of $31700. In 2015 the figure would be $68500.
In terms of percentages, the largest increases in the period 1995-2008 were in the UK and Spain, 157% and 150%, respectively. In 2008 the Spanish public debt was around the average for Europe - 62%. But the private one was huge - 180% of GDP. The nervousness of the market is quite reasonable: the banking crisis showed us how easy a private debt can turn into a public one (remember Bankia’s rescue?). The annual growth rate of the Spanish debt from the year 2000 until 2008 was 7.8%, more than double than in the States.
The first consumers to understand the need of decreasing one’s own debt were the Americans. In 2008 they had a debt of 129% of their own available income but it later got 11% reduced, compared to 4% in Spain and 6% in the United KIngdom. If things keep on going the way they are right now, the debt would be quite manageable in 2013 (103%). Analysts say that one of the best examples of debt reduction in history are the cases of Sweden and Finland in the 90s. They reduced around 30% in a very short period of time. Well, of course, we have to mention the good economic environment back then - both countries had a huge increase in their exports.
The US is in the same direction. Thanks to the weak dollar the commercial deficit went from 6% to 4% of GDP since 2006. The exports to the developed countries increased with 20% since 2007 but the increase in the exports towards Latin America and China is even more important - 51% and 53%, respectively. The problem is that this process has just started in the countries that are next to (tightly related to) the euro zone. While in Germany the exports are 50% of GDP the average rate in the euro zone is 35%, in Spain the number is only 20%.
Isn’t it better if we simply try to live debt free? And trouble free? I believe that loans should be used only in case of emergency and not as a tool for growth.
