This document provides an overview and analysis of debt and deleveraging. It discusses the high levels of debt that built up in various sectors prior to the financial crisis, including households, governments, non-financial companies, and the financial sector. It then analyzes four ways that deleveraging can occur: through mass bankruptcies, austerity measures, high inflation, or growing the economy to outpace the debt. The document reviews empirical research on 45 past cases of deleveraging and considers implications for policymakers seeking to address current high debt levels.

1. Debt and Deleveraging – A Critical Analysis skimminglight.net
A critical analysis of
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2. Debt and Deleveraging – A Critical Analysis skimminglight.net
Content
● Who is McKinsey? ● Capitalism in crisis
● Leverage ● Interest rates
– Aggregated ● 4 x Deleveraging
– Households ● Empirical research
– Governments
– Companies
● Proposed policy
– Financial sector ● Conclusions
– BRIC-countries
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3. Debt and Deleveraging – A Critical Analysis skimminglight.net
Who is McKinsey?
● World-wide management consulting firm,
focussing at strategical issues of the top
management
● Advises many companies, gevernments and
institutions
● One of the most prestigious consulting firms
in the world
● Delivered proportionally most CEOs to big
companies
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4. Debt and Deleveraging – A Critical Analysis skimminglight.net
Aggregated
Leverage
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5. Debt and Deleveraging – A Critical Analysis skimminglight.net
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6. Debt and Deleveraging – A Critical Analysis skimminglight.net
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7. Debt and Deleveraging – A Critical Analysis skimminglight.net
Some Smaller Countries
● Iceland
– Debt +9*GDP in ['00-'08] to 1189% GDP
● Fin. sector 580% (aim: fin. hub)
● Ireland
– Debt rose to over 700% GDP
● Fin. sector 421% (aim: fin. hub)
● Greece
– Debt 230% GDP (110% government)
– Speculators: ”economy Gr.?”
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8. Debt and Deleveraging – A Critical Analysis skimminglight.net
Leverage
Households
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9. Debt and Deleveraging – A Critical Analysis skimminglight.net
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10. Debt and Deleveraging – A Critical Analysis skimminglight.net
Leverage Households
● Surging real estate prices
– Stimulated high mortgages
– Virtual wealth owners stimulated borrowing
● Growth GDP goes along with increased leverage
– UK: '00-'08:
● GDP: +48%
● Relative debt: +32%
● Absolute debt: +47%
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11. Debt and Deleveraging – A Critical Analysis skimminglight.net
Leverage
Governments
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12. Debt and Deleveraging – A Critical Analysis skimminglight.net
Steady Levels of Leverage
● 2000-2008: “did not change much”
● 2012: Situation drastically changed
– State intervention in companies
● “Too big to fail”
– Surging unemployment
– Surging interest rates
– Recession
– ....
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13. Debt and Deleveraging – A Critical Analysis skimminglight.net
Leverage
Non-financial
Companies
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14. Debt and Deleveraging – A Critical Analysis skimminglight.net
Trends before crisis
● Most companies
– Rising profits
– Increasing equities
– Decreasing debt/equity
– Exceptions:
● Real estate
● Leveraged Buyout
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15. Debt and Deleveraging – A Critical Analysis skimminglight.net
Trends before crisis
● Real estate
– Rising debt/equity
– Caused by
● Low interest rates
● Quickly rising real estate prices
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16. Debt and Deleveraging – A Critical Analysis skimminglight.net
Trends before crisis
● Leveraged buyout
– Predator company borrows money
– To acquire prey company
– Debt moved to prey company
– Prey company restructures
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17. Debt and Deleveraging – A Critical Analysis skimminglight.net
Leverage
Financal Sector
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18. Debt and Deleveraging – A Critical Analysis skimminglight.net
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19. Debt and Deleveraging – A Critical Analysis skimminglight.net
Conclusions
● Bigger share financial institutions in GDP
– Leverage relatively more limited
● Shift deposits > loans
– Drying up wholesale markt => banking crisis
● Increase leverage mainly in some countries
– UK, US (Broker dealers), Spain
● Leverage not excessive
– “did not exceed previous peaks” (around 1990)
– “below historic levels”
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20. Debt and Deleveraging – A Critical Analysis skimminglight.net
Leverage?
● Leverage
= assets/equity
= 1 + debts/equity
Equity => Leverage
● Greek obligations, CDOs, ...
● One sentence: “this suggests that ....
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21. Debt and Deleveraging – A Critical Analysis skimminglight.net
BRIC Countries
(1) Brazil, Russia, India & China
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22. Debt and Deleveraging – A Critical Analysis skimminglight.net
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23. Debt and Deleveraging – A Critical Analysis skimminglight.net
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24. Debt and Deleveraging – A Critical Analysis skimminglight.net
Policy space
● OECD countries
– = investments & market
● In theory
– Some Keynesian measures
● In case of crisis
– Fast rise of debt level
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25. Debt and Deleveraging – A Critical Analysis skimminglight.net
Capitalism
in
Crisis
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26. Debt and Deleveraging – A Critical Analysis skimminglight.net
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27. Sources: Deleveraging – A Critical Analysis
Debt and
treasurydirect.gov 1946:121% today:
skimminglight.net
usdebtclock.org 101%
usgovernmentspending.com
1941:39%
2008: 70%
1929:16%
1981:32%
1917:6%
Gre
-at structural
De- crisis of
pres capitalism
-sion
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28. Debt and Deleveraging – A Critical Analysis skimminglight.net
What preceeded...
● Golden sixties
– Low unemployment
● Seventies: High inflation
– Caused by commoddities & wages
– Result: decreasing investments
● Lower productivity growth
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29. Debt and Deleveraging – A Critical Analysis skimminglight.net
Declining Gross Profit Share
Source: Capitalism Unleashed, Andrew Glyn, 2007, Oxford University Press
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30. Debt and Deleveraging – A Critical Analysis skimminglight.net
The Offensive
● '79-'81: Volker (FED) raises interest rate
– Slowing down demand
– Rise unemployment (→ pressure wages)
● '81: Reagan axes 11.345 air traffic
controllers
● '83: Mitterand changes policy
● '85: Thatcher defeats mine workers
● '89: Fall Berlin wall
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31. Debt and Deleveraging – A Critical Analysis skimminglight.net
Inflation & Real Wages Under Control
Source: Capitalism Unleashed, Andrew Glyn, 2007, Oxford University Press
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32. Debt and Deleveraging – A Critical Analysis skimminglight.net
Rising Gross Profit Share
Source: Capitalism Unleashed, Andrew Glyn, 2007, Oxford University Press
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33. Debt and Deleveraging – A Critical Analysis skimminglight.net
Rising unemployment
Source: Capitalism Unleashed, Andrew Glyn, 2007, Oxford University Press
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34. Debt and Deleveraging – A Critical Analysis skimminglight.net
Structural crisis
● Starting around 1980
– Rising profits at expense of wages
– Housholds no longer able to buy all
produced goods
– Leverage delayed crisis
– Financial products more profitable
than real economy
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35. Debt and Deleveraging – A Critical Analysis skimminglight.net
Higher debt
=
Higher burden?
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36. Debt and Deleveraging – A Critical Analysis skimminglight.net
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37. Debt and Deleveraging – A Critical Analysis skimminglight.net
Higher interest burden?
● Government
– In difficulities → higher interest rates
– Despite measures central banks
– Recession/depreciation: Aggravate redeem
● Banks
– Often “too big to fail”
● Households
– Swept away in hype/bubble
– Swept away in crisis
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38. Debt and Deleveraging – A Critical Analysis skimminglight.net
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39. Debt and Deleveraging – A Critical Analysis skimminglight.net
Four ways
of
Deleveraging
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40. Debt and Deleveraging – A Critical Analysis skimminglight.net
Four ways of deleveraging
● Mass bankrupties
● Austerity
● High inflation
● Outgrowing debt
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41. Debt and Deleveraging – A Critical Analysis skimminglight.net
Mass Bankruptcies (1/3)
● Households
– Sell properties, expropriations, ...
– Poverty
– Lenders → losses
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42. Debt and Deleveraging – A Critical Analysis skimminglight.net
Mass Bankruptcies (2/3)
● Companies
– Small: bankrupt
● Lenders → financial losses
● Job losses
– Big: (temporarily) state support
● Part burden to government
● Reorganizations
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43. Debt and Deleveraging – A Critical Analysis skimminglight.net
Mass Bankruptcies (3/3)
● Government
– Revision of debt
– Getting part of debt acquitted
– Austerity program
● Lenders
– Potentially insufficiently solvent to
cope with losses.
– See previous slide
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44. Debt and Deleveraging – A Critical Analysis skimminglight.net
Austerity (1/3)
● Expectations
– Competitiveness
– Export
– Purchasing power
● But wold-wide cut-backs...
– World market
– Average competitiveness =
– Export
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45. Debt and Deleveraging – A Critical Analysis skimminglight.net
Austerity (2/3)
● Canada 1993-1997
– “Canada’s deleveraging episode
provides a model for countries with
highly indebted governments today.
The key requirement was the political
will to force through unpopular
government spending cuts.“
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46. Debt and Deleveraging – A Critical Analysis skimminglight.net
Austerity (3/3)
“If today’s economies were to follow this
path, they would experience six to seven
years of deleveraging, in which the debt-to-
GDP ratio declines by around 25 percent.
Deleveraging would begin two years after
the start of the crisis, and GDP would
contract for the first two to three years of
deleveraging, and then start growing
again.”
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47. Debt and Deleveraging – A Critical Analysis skimminglight.net
Inflation
● Method
– Money creation
● Effects
– Value currency (Devaluation)
– Real wages (aim: export )
– Relative debt in own currency
– Absolute debt in foreign currencies
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48. Debt and Deleveraging – A Critical Analysis skimminglight.net
4 ways towards deleveraging
● Growth?
– On the basis of
● Growing internal purchasing power?
● Increasing export?
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49. Debt and Deleveraging – A Critical Analysis skimminglight.net
Emprical
Research
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50. Debt and Deleveraging – A Critical Analysis skimminglight.net
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51. Debt and Deleveraging – A Critical Analysis skimminglight.net
Incorrect generalization
based on non-representative sample
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52. Debt and Deleveraging – A Critical Analysis skimminglight.net
45 cases of deleveraging
● 43 in [1969, 2008]
– Period of world-wide economic growth
– From '80: thanks to debt growth elsewhere
– Mostly one domain considered (e.g. government)
● UK 1947-1980
– Golden age of capitalism
● US 1929-1943
– '29-'33: Mass bankruptcies & rising debts %
– '34-'37: Austerity
– '38-'43: Growth thanks to war
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53. Debt and Deleveraging – A Critical Analysis skimminglight.net
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54. Debt and Deleveraging – A Critical Analysis skimminglight.net
Graph conflicts with
other, publicly available data
See e.g. http://www.usgovernmentspending.com &
http://www.treasurydirect.gov
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55. Debt and Deleveraging – A Critical Analysis skimminglight.net
Behind the
deleveraging
graph...
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56. Debt and Deleveraging – A Critical Analysis skimminglight.net
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57. Debt and Deleveraging – A Critical Analysis skimminglight.net
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58. Debt and Deleveraging – A Critical Analysis skimminglight.net
Proposed
Policy
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59. Debt and Deleveraging – A Critical Analysis skimminglight.net
Ma
1.“Policy makers should work toward developing an
international system for tracking leverage at a granular
k eb
sector level across countries and over time.”
2.“Bank executives should adjust their internal risk models
orr
to reflect leverage in sectors of the real economy.”
ow economy. “
3.“Macroprudential policy should also reflect leverage in
ingreassess the need for further
specific sectors of the real
rapid increases in bank capitalm
4.“Financial regulators should
otoe pockets of
ratios.”
5.“Monetary policy makers should act r prevent
leverage.” dif
fic
6.“Tax preferences for debt, and especially for real estate
lending, should be revisited.” ult
7.“Regulators should also revisit the broader set of !
incentives for households taking on debt”
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60. Debt and Deleveraging – A Critical Analysis skimminglight.net
Conclusion
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61. Debt and Deleveraging – A Critical Analysis skimminglight.net
Conclusion
● Ideological report
● Answer needed
– Current situation
● Systemic crisis
● Addicted to cheap money
● Limits reached
● Deepening tensions
– Alternative
● Socialize economy
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