The debt implosion from 2007 to 2009 shook the financial world. But a still-bigger debt disaster may be on the horizon.
The just-published May Elliott Wave Financial Forecast comments on the findings of consulting firm McKinsey & Co.
According to a February 2014 study…total global debt is up 40% since 2007 to $199 trillion. As a percentage of GDP, “debt is now higher in most nations than it was before the crisis” of 2008/09. On average globally, it is 286% now vs. 269% in 2007.
Thirteen nations highlighted in the study (including the U.S., Japan and several in Europe) require an average growth rate of 3.3% just to start to deleverage.
Germany and Spain saw a pickup in economic activity in Q4 of 2014. But, overall, economic growth looks increasingly feeble. Take a look at these recent headlines:
- China’s Economy Slows to Weakest Since 2009 as Output Wanes – (Bloomberg, April 14)
- UK economic growth slows to 0.3% in first quarter – (Financial Times, April 28)
- U.S. economy grew at anemic 0.2% pace in Q1 – (USA Today, April 29)
- Bank of Japan cuts economic growth, inflation outlook – (Agence France-Presse, April 30)
- Reserve Bank [of Australia] to cut interest rates in May in face of weak economy – (Sydney Morning Herald, May 1)
The McKinsey study goes on to say that debt is rising among households and corporations.
The milestone in rejections of corporate loan applications also suggests that the “debt bomb” is ticking. Take a look at this chart and commentary from the April Elliott Wave Theorist:
ZeroHedge… posted a thirteen-year index reflecting the rate at which corporate loan applications at banks and other lenders are rejected each month, as reported by the National Association of Credit Management (NACM). …
At EWI, we call the plunge shown in the final bar a “light-switch” event. Suddenly in March 2015, banks and other lending institutions rejected business loan applications at a rate that must be at a record high since the 1940s. Wow. Here is one more amazing indicator of monetary and economic weakness in the face of stock market strength.
Business loan application rejections reflect a psychology described in the third edition of Conquer the Crash:
When the social mood trend changes from optimism to pessimism, creditors, debtors, producers and consumers change their primary orientation from expansion to conservation. As creditors become more conservative, they slow their lending.
Current global debt levels are unsustainable.
Our indicators suggest that the next debt crisis could be the most severe in U.S. history.
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This article was syndicated by Elliott Wave International and was originally published under the headline Brace Yourself for a Bigger Debt Bomb. EWI is the world’s largest market forecasting firm. Its staff of full-time analysts led by Chartered Market Technician Robert Prechter provides 24-hour-a-day market analysis to institutional and private investors around the world.
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