"The Age of Leverage"

This speech by Bank of Canada Senior Deputy Governor Carolyn Wilkins, delivered in Vancouver this week, is well worth reading.  As the title suggests, the theme is debt: Ms Wilkins points out that the aggregate level of global borrowing is now about three times as large as global GDP.  The Bank has often fretted in the past about excessive borrowing within Canada, particularly in the household sector, but Ms Wilkins casts the net much more broadly than that.

Needless to say, she mentions the Canadian household debt/income ratio, currently at 178 percent, as a key vulnerability for the domestic economy and financial system.  Indeed, StatsCan reported today that the ratio actually edged higher in the final quarter of last year, dashing earlier hopes that Canadians might be starting to conquer their addiction to debt. 

With that out of the way, Ms Wilkins turns her attention to other forms of debt.  She notes the burgeoning level of public debt, led by Japan and the United States.  It's clear enough from the tone of her remarks that the Bank is not an adherent of Modern Monetary Theory, even though she notes that the enormous debts of those two countries in particular are "less of a worry" than the public debts of Eurozone countries.

Ms Wilkins's focus then switches to private sector corporate debt.  She notes the solid improvement in banks' balance sheets since the financial crisis -- indeed, this is one of the key reasons for her belief that the current level of international debt need not lead to a fresh crisis.  However, she is concerned at the rapid growth of corporate debt in China, and also the growth in the debt of non-bank financial institutions, which have expanded to fill the gap left by traditional banks as the latter have repaired their balance sheets.

There's plenty to be gloomy about here, but in the end Ms Wilkins manages to sound an optimistic note.  A crisis is probably avoidable, given that the financial system is in better shape than it was in 2007, just before the financial crisis hit; given that China is starting to take steps towards deleveraging; and given that global GDP growth makes debts easier to carry and service. 

The obvious risk to this rosy scenario is that the global economic expansion is becoming positively geriatric. Anything that causes growth to slow or even reverse would soon turn bloated borrowing into a problem. In this context, Ms Wilkins identifies "one thing we should absolutely not do: have a trade war".  When the world's most enthusiastic borrower is also its main trade belligerent, that's clearly a major source of risk going forward.