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Debt of households and governments : triggers the next financial crisis ?

by

Hubert Roy

3 October 2018 11:30

Photo : Freepik

How to solve the next financial crisis ? Probably not as the last time, according to the think tank McKinsey. The governments of the world will not plunge into their surplus to repair the broken pots as in 2008, anticipates-t-it.

In a podcast released this summer, and the transcript of which was made public a few days ago, Susan Lund, partner, McKinsey Global Institute, focused on the aftermath of the stock market crisis of 2008, by asking a question : is it that the governments could come to the rescue of the stock markets as they did ten years ago ? She said doubt it strongly.

She reminds us that the epicentre of the 2008 crisis was the housing market, while banks had created new types of financial instruments. In Canada, we remember the episode of the commercial paper. She also points out that the real estate bubbles and banking crises often go hand in hand.

Ms. Lund said that things have changed since 2008. Not necessarily positively, she says.

A debt, which represents 2.4 times the global GDP

First of all, government debt has reached an unprecedented level. In 2008, government debt was 2 times the size of global GDP. Ten years later, we talk about 2.4 times the size of global GDP. This ensures that the government debt has doubled in ten years, representing 60 trillion dollars. Ms. Lund mentioned that one of the causes of this indebtedness increased is that the governments have given financial aid to the banking system.

Then, household debt has continued to increase, although the portrait varies from country to country. In this chapter, Canada is a country where household debt is increasing year by year. Mixed with that that property prices have increased rapidly and substantially.

“Today, the debt of canadian households is much higher than that of us households at the peak of the stock market crisis of 2008 “, said Ms. Lund.

The analyst of McKinsey anticipates that the next stock market crisis world-can present a mix of mortgage debt and personal debt. It takes for example the United States, where student debt has exploded in recent years. The situation a mortgage in the United States has improved, but many Americans still draw from the devil by the tail, financially speaking, ” she said.

“One of the only things we know is that the next crisis will probably not be the last. It is difficult to predict where it will come from. Will-t-she of the debt-corporate, especially in the emerging markets ? Will-t-she a real-estate bubble that will burst in a market such as Canada ? Will-t-it of a wobble in the chinese economy, where the debt is also very high ? These risks are probably not as systemic as the bursting of the u.s. real estate market of 2008, but there are dangers, ” said Ms. Lund.

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