IMF Worries that World Financial Crisis Could Explode Due to Rising Debt Levels
The International Monetary Fund (IMF) has a message that most central banks don’t want to acknowledge. In its latest report, the IMF is warning governments that a prolonged debt-fueled rise in consumer spending could spark a world financial crisis. If true, the biggest loser could be American stock exchanges.
The IMF’s analysis indicates that, although economies benefited in the first two to three years from increased household borrowing, the downside risks are now increasing. Once spending becomes debt-dependent, a financial crash could follow two to three years later. (Source: “IMF warns that using consumer debt to fuel growth risks crisis,” The Guardian, October 3, 2017).
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Given that the U.S. Housing bubble and subsequent ratcheting down of interest rates happened almost a decade ago, I’d say we’re pretty much due for another crash.
The problem with increasing debt usage is that it pushes consumption demand forward. While this greases the wheels of consumption today, it acts as a headwind the further that time marches on.
Eventually, people’s discretionary income drops, but the debt stays, requiring more disposable income to serve non-production debt payments. The IMF is warning that this point has arrived. Either government finds a creative outlet to keep credit flowing, or the piper will be have to be paid.
Consumer Trends in the United States
The very latest spending data we have is not encouraging.
In mid-September, the U.S. Department of Commerce released its latest batch of numbers to an anticipatory Wall Street clique. The numbers came back snake eyes. U.S. retail sales unexpectedly fell in August, declining 0.2%, despite expectations for a 0.1% gain. Hurricane Harvey (justifiably) shoulders some of the blame, so it’s much too early to jump to conclusions. (Source: “US retail sales fell 0.2% in Aug, vs 0.1% increase expected,” CNBC, September 15, 2017).
Even so, there’s no doubt that, sometime relatively soon, the numbers will start petering out without a tangible excuse. Growing consumer debt levels—only held in check by low interest rates—will be the primary cause. When that happens, we may see the unraveling that the IMF is warning about.
