How do we think about debt?
Debt has an important role to play in the financing of productive investment, with government borrowing also potentially helping to limit downswings in economic activity. But it comes with a requirement to pay interest and to repay maturing loans. Too much debt challenges both of these requirements, limiting the ability of borrowers to take on even more debt and in some cases forcing deleveraging or default.
In Road to 2030, we examine the toolset governments and central banks may employ and the scenarios investors need to consider.
What central banks have been able to do, however, is to lower the cost of debt, pushing interest rates down below the rates of nominal income growth and by using their balance sheets to underpin cheap government and corporate borrowing. This financial repression, unfortunately, interrupts the market’s ability to price risk efficiently. It also forces savers to reach for returns elsewhere, pushing up asset prices and reducing future returns. A series of events that are reinforcing. All of this suggests governments and central banks will continue to look for ways to limit the growth of debt burdens.
We use mindmaps to organise and articulate our thoughts about subjects that are conceptually complex, and below shows our theme debt.