FRACTIONAL FLOW

Posts Tagged ‘global GDP

The Oil Price, Total Global Debt And Interest Rates

In several posts I have presented my exploration of any relations between total global debt, interest rates and the oil price.

Sometimes I am left with the impression that when societies’ are looking for a scapegoat for its ills, their reactions bring forth memories from a scene of the movie “Casablanca”, where Captain Renault confronted with solving a crime commands his men; “Round up the usual suspects!”.

For many years one of these “usual suspects” has been and will continue to be: The Oil Price.

However, looking at time series of developments in total global debt and interest rates makes me wonder if not more light should have been directed towards developments in total global debt and interest rates to obtain profound understandings of the fundamental forces that drives the oil price through its ebbs and flows.

In the post “It is the Debt, Stupid” from December 2011 (in Norwegian and refer figure 6) I illustrated how much a 1% increase in the interest rate for public debt in some countries equated to as an increase in the oil price (this was admittedly a simplistic and static comparison, and the exercise was intended to draw attention to the level of debts which made many economies more sensitive to interest hikes than to oil price increases).

Starting in 2014 there has been a steady flow of reports, worth studying, that focused on the growth in total global debt levels, like the 84th BIS Annual Report 2013/2014 and VOX CEPR (CEPR; The Centre for Economic Policy Research) with its “Deleveraging, What Deleveraging?”, The 16th Geneva Report on the World Economy.

In February 2015 McKinsey published “Debt and (not much) deleveraging” which also presents some deep insights into developments of debt by sector for some countries.

Figure 1: Chart above has been lifted from page 1 of the Executive summary of the McKinsey report “Debt and (not much) deleveraging” made public in February 2015.

Figure 1: Chart above has been lifted from page 1 of the Executive summary of the McKinsey report “Debt and (not much) deleveraging” made public in February 2015.

The chart above contains plenty of information about total global debt levels, debt and developments to the growth rate of debt by sector and not least, how total global debt has grown faster than Gross Domestic Product (GDP).

The short version is that post the Global Financial Crisis (GFC) of 2008, which was triggered by too much debt, the global economy was brought back on its trajectory by the use of more debt stimulated by low interest rates.

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