I saw this first via vruz, and decided to download and read the report after seeing his excerpt from the executive summary.
My translation:
- Certain countries (Spain, UK, US) are still extremely indebted/leveraged.
- Deleveraging (massive defaults, belt tightening, then growth), is likely.
- Deleveraging is painful and we’re all in for a world of hurt lasting the next 7 years.
McKinsey is not some fringe group. This report will be read by policymakers. Elsewhere, people are viewing this report as equivalent to calling the UK the next Iceland.
The report does provide a “recommendations for regulators” section (page 46), but it looks like it is better suited to preventing a repeat of this crisis down the line than successfully navigating our way out of this one.
If you skip to Appendix A, you get some great graph captions, such as “Even after removing foreign lending by UK banks, UK debt / GDP remains higher than every country’s except Japan (382 percent).” Several countries get their own cool graphs and captions. I would redo Canada’s to be “Canada: Not as Screwed as Everyone Else.”
Here’s the “and we may be optimistic” part:
While the historic record is helpful, several aspects of the crisis today could make deleveraging more difficult than in the past. Most of the past episodes involved one economy or a few relatively small economies following a national or regional crisis. Today, however, the crisis is global in scale, affecting the world’s biggest economies, many of which are still in recession or experiencing very tepid growth. It is difficult to see how all the affected economies could simultaneously deleverage by boosting net exports, as many countries have done in the past.
Moreover, rising government debt may delay the start of deleveraging. Government debt is projected to increase sharply in Spain, the United Kingdom, and the United States. This could more than offset any deleveraging by the private sector, and thus delay the point at which an entire economy’s debt-to-GDP ratio declines. Should these economies start deleveraging sooner through far more severe reductions in debt in the private sector, the economic recovery may be derailed.
Awesome. If anyone needs me, I’ll be in my bunker, in the fetal position next to my cans of spam.
