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Debt & Deleveraging (Mckinsey) - A critical analysis

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This presentation analyses the <a>report</a> that has been published by the McKinsey Global Institute in 2011 and which is entitled "debt and Deleveraging". The presentation zooms in on the …

This presentation analyses the <a>report</a> that has been published by the McKinsey Global Institute in 2011 and which is entitled "debt and Deleveraging". The presentation zooms in on the dramatic level and the dramatic increase of debt by governments, households, non-financial and financial companies in OECD countries. This evolution is then put into the broader perspective of post-war capitalism, which transformed into neoliberalism at the beginning of the eighties. Neoliberalism can only function by increasing the overall level of indebtness, which has now reached an unsustainable level. As a consequence capitalism has now entered a phase of a rapidely deepening crisis. The solutions proposed by McKinsey have a pseudo-scientific basis and fit perfectly into the obsolete neoliberal policies.

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  • 1. Debt and Deleveraging – A Critical Analysis skimminglight.net A critical analysis of20 okt 2012 Aug 2012 1/61
  • 2. Debt and Deleveraging – A Critical Analysis skimminglight.net Content ● Who is McKinsey? ● Capitalism in crisis ● Leverage ● Interest rates – Aggregated ● 4 x Deleveraging – Households ● Empirical research – Governments – Companies ● Proposed policy – Financial sector ● Conclusions – BRIC-countries20 okt 2012 Aug 2012 2/61
  • 3. Debt and Deleveraging – A Critical Analysis skimminglight.net Who is McKinsey? ● World-wide management consulting firm, focussing at strategical issues of the top management ● Advises many companies, gevernments and institutions ● One of the most prestigious consulting firms in the world ● Delivered proportionally most CEOs to big companies20 okt 2012 Aug 2012 3/61
  • 4. Debt and Deleveraging – A Critical Analysis skimminglight.net Aggregated Leverage20 okt 2012 Aug 2012 4/61
  • 5. Debt and Deleveraging – A Critical Analysis skimminglight.net20 okt 2012 Aug 2012 5/61
  • 6. Debt and Deleveraging – A Critical Analysis skimminglight.net20 okt 2012 Aug 2012 6/61
  • 7. Debt and Deleveraging – A Critical Analysis skimminglight.net Some Smaller Countries ● Iceland – Debt +9*GDP in [00-08] to 1189% GDP ● Fin. sector 580% (aim: fin. hub) ● Ireland – Debt rose to over 700% GDP ● Fin. sector 421% (aim: fin. hub) ● Greece – Debt 230% GDP (110% government) – Speculators: ”economy Gr.?”20 okt 2012 Aug 2012 7/61
  • 8. Debt and Deleveraging – A Critical Analysis skimminglight.net Leverage Households20 okt 2012 Aug 2012 8/61
  • 9. Debt and Deleveraging – A Critical Analysis skimminglight.net20 okt 2012 Aug 2012 9/61
  • 10. Debt and Deleveraging – A Critical Analysis skimminglight.net Leverage Households ● Surging real estate prices – Stimulated high mortgages – Virtual wealth owners stimulated borrowing ● Growth GDP goes along with increased leverage – UK: 00-08: ● GDP: +48% ● Relative debt: +32% ● Absolute debt: +47%20 okt 2012 Aug 2012 10/61
  • 11. Debt and Deleveraging – A Critical Analysis skimminglight.net Leverage Governments20 okt 2012 Aug 2012 11/61
  • 12. Debt and Deleveraging – A Critical Analysis skimminglight.net Steady Levels of Leverage ● 2000-2008: “did not change much” ● 2012: Situation drastically changed – State intervention in companies ● “Too big to fail” – Surging unemployment – Surging interest rates – Recession – ....20 okt 2012 Aug 2012 12/61
  • 13. Debt and Deleveraging – A Critical Analysis skimminglight.net Leverage Non-financial Companies20 okt 2012 Aug 2012 13/61
  • 14. Debt and Deleveraging – A Critical Analysis skimminglight.net Trends before crisis ● Most companies – Rising profits – Increasing equities – Decreasing debt/equity – Exceptions: ● Real estate ● Leveraged Buyout20 okt 2012 Aug 2012 14/61
  • 15. Debt and Deleveraging – A Critical Analysis skimminglight.net Trends before crisis ● Real estate – Rising debt/equity – Caused by ● Low interest rates ● Quickly rising real estate prices20 okt 2012 Aug 2012 15/61
  • 16. Debt and Deleveraging – A Critical Analysis skimminglight.net Trends before crisis ● Leveraged buyout – Predator company borrows money – To acquire prey company – Debt moved to prey company – Prey company restructures20 okt 2012 Aug 2012 16/61
  • 17. Debt and Deleveraging – A Critical Analysis skimminglight.net Leverage Financal Sector20 okt 2012 Aug 2012 17/61
  • 18. Debt and Deleveraging – A Critical Analysis skimminglight.net20 okt 2012 Aug 2012 18/61
  • 19. Debt and Deleveraging – A Critical Analysis skimminglight.net Conclusions ● Bigger share financial institutions in GDP – Leverage relatively more limited ● Shift deposits > loans – Drying up wholesale markt => banking crisis ● Increase leverage mainly in some countries – UK, US (Broker dealers), Spain ● Leverage not excessive – “did not exceed previous peaks” (around 1990) – “below historic levels”20 okt 2012 Aug 2012 19/61
  • 20. Debt and Deleveraging – A Critical Analysis skimminglight.net Leverage? ● Leverage = assets/equity = 1 + debts/equity Equity => Leverage ● Greek obligations, CDOs, ... ● One sentence: “this suggests that ....20 okt 2012 Aug 2012 20/61
  • 21. Debt and Deleveraging – A Critical Analysis skimminglight.net BRIC Countries (1) Brazil, Russia, India & China20 okt 2012 Aug 2012 21/61
  • 22. Debt and Deleveraging – A Critical Analysis skimminglight.net20 okt 2012 Aug 2012 22/61
  • 23. Debt and Deleveraging – A Critical Analysis skimminglight.net20 okt 2012 Aug 2012 23/61
  • 24. Debt and Deleveraging – A Critical Analysis skimminglight.net Policy space ● OECD countries – = investments & market ● In theory – Some Keynesian measures ● In case of crisis – Fast rise of debt level20 okt 2012 Aug 2012 24/61
  • 25. Debt and Deleveraging – A Critical Analysis skimminglight.net Capitalism in Crisis20 okt 2012 Aug 2012 25/61
  • 26. Debt and Deleveraging – A Critical Analysis skimminglight.net20 okt 2012 Aug 2012 26/61
  • 27. Sources: Deleveraging – A Critical AnalysisDebt andtreasurydirect.gov 1946:121% today: skimminglight.netusdebtclock.org 101%usgovernmentspending.com 1941:39% 2008: 70% 1929:16% 1981:32%1917:6% Gre -at structural De- crisis of pres capitalism -sion20 okt 2012 Aug 2012 27/61
  • 28. Debt and Deleveraging – A Critical Analysis skimminglight.net What preceeded... ● Golden sixties – Low unemployment ● Seventies: High inflation – Caused by commoddities & wages – Result: decreasing investments ● Lower productivity growth20 okt 2012 Aug 2012 28/61
  • 29. Debt and Deleveraging – A Critical Analysis skimminglight.net Declining Gross Profit ShareSource: Capitalism Unleashed, Andrew Glyn, 2007, Oxford University Press20 okt 2012 Aug 2012 29/61
  • 30. Debt and Deleveraging – A Critical Analysis skimminglight.net The Offensive ● 79-81: Volker (FED) raises interest rate – Slowing down demand – Rise unemployment (→ pressure wages) ● 81: Reagan axes 11.345 air traffic controllers ● 83: Mitterand changes policy ● 85: Thatcher defeats mine workers ● 89: Fall Berlin wall20 okt 2012 Aug 2012 30/61
  • 31. Debt and Deleveraging – A Critical Analysis skimminglight.net Inflation & Real Wages Under ControlSource: Capitalism Unleashed, Andrew Glyn, 2007, Oxford University Press20 okt 2012 Aug 2012 31/61
  • 32. Debt and Deleveraging – A Critical Analysis skimminglight.net Rising Gross Profit ShareSource: Capitalism Unleashed, Andrew Glyn, 2007, Oxford University Press20 okt 2012 Aug 2012 32/61
  • 33. Debt and Deleveraging – A Critical Analysis skimminglight.net Rising unemploymentSource: Capitalism Unleashed, Andrew Glyn, 2007, Oxford University Press20 okt 2012 Aug 2012 33/61
  • 34. Debt and Deleveraging – A Critical Analysis skimminglight.net Structural crisis ● Starting around 1980 – Rising profits at expense of wages – Housholds no longer able to buy all produced goods – Leverage delayed crisis – Financial products more profitable than real economy20 okt 2012 Aug 2012 34/61
  • 35. Debt and Deleveraging – A Critical Analysis skimminglight.net Higher debt = Higher burden?20 okt 2012 Aug 2012 35/61
  • 36. Debt and Deleveraging – A Critical Analysis skimminglight.net20 okt 2012 Aug 2012 36/61
  • 37. Debt and Deleveraging – A Critical Analysis skimminglight.net Higher interest burden? ● Government – In difficulities → higher interest rates – Despite measures central banks – Recession/depreciation: Aggravate redeem ● Banks – Often “too big to fail” ● Households – Swept away in hype/bubble – Swept away in crisis20 okt 2012 Aug 2012 37/61
  • 38. Debt and Deleveraging – A Critical Analysis skimminglight.net20 okt 2012 Aug 2012 38/61
  • 39. Debt and Deleveraging – A Critical Analysis skimminglight.net Four ways of Deleveraging20 okt 2012 Aug 2012 39/61
  • 40. Debt and Deleveraging – A Critical Analysis skimminglight.net Four ways of deleveraging ● Mass bankrupties ● Austerity ● High inflation ● Outgrowing debt20 okt 2012 Aug 2012 40/61
  • 41. Debt and Deleveraging – A Critical Analysis skimminglight.net Mass Bankruptcies (1/3) ● Households – Sell properties, expropriations, ... – Poverty – Lenders → losses20 okt 2012 Aug 2012 41/61
  • 42. Debt and Deleveraging – A Critical Analysis skimminglight.net Mass Bankruptcies (2/3) ● Companies – Small: bankrupt ● Lenders → financial losses ● Job losses – Big: (temporarily) state support ● Part burden to government ● Reorganizations20 okt 2012 Aug 2012 42/61
  • 43. Debt and Deleveraging – A Critical Analysis skimminglight.net Mass Bankruptcies (3/3) ● Government – Revision of debt – Getting part of debt acquitted – Austerity program ● Lenders – Potentially insufficiently solvent to cope with losses. – See previous slide20 okt 2012 Aug 2012 43/61
  • 44. Debt and Deleveraging – A Critical Analysis skimminglight.net Austerity (1/3) ● Expectations – Competitiveness – Export – Purchasing power ● But wold-wide cut-backs... – World market – Average competitiveness = – Export20 okt 2012 Aug 2012 44/61
  • 45. Debt and Deleveraging – A Critical Analysis skimminglight.net Austerity (2/3) ● Canada 1993-1997 – “Canada’s deleveraging episode provides a model for countries with highly indebted governments today. The key requirement was the political will to force through unpopular government spending cuts.“20 okt 2012 Aug 2012 45/61
  • 46. Debt and Deleveraging – A Critical Analysis skimminglight.net Austerity (3/3) “If today’s economies were to follow this path, they would experience six to seven years of deleveraging, in which the debt-to- GDP ratio declines by around 25 percent. Deleveraging would begin two years after the start of the crisis, and GDP would contract for the first two to three years of deleveraging, and then start growing again.”20 okt 2012 Aug 2012 46/61
  • 47. Debt and Deleveraging – A Critical Analysis skimminglight.net Inflation ● Method – Money creation ● Effects – Value currency (Devaluation) – Real wages (aim: export ) – Relative debt in own currency – Absolute debt in foreign currencies20 okt 2012 Aug 2012 47/61
  • 48. Debt and Deleveraging – A Critical Analysis skimminglight.net 4 ways towards deleveraging ● Growth? – On the basis of ● Growing internal purchasing power? ● Increasing export?20 okt 2012 Aug 2012 48/61
  • 49. Debt and Deleveraging – A Critical Analysis skimminglight.net Emprical Research20 okt 2012 Aug 2012 49/61
  • 50. Debt and Deleveraging – A Critical Analysis skimminglight.net20 okt 2012 Aug 2012 50/61
  • 51. Debt and Deleveraging – A Critical Analysis skimminglight.net Incorrect generalization based on non-representative sample20 okt 2012 Aug 2012 51/61
  • 52. Debt and Deleveraging – A Critical Analysis skimminglight.net 45 cases of deleveraging ● 43 in [1969, 2008] – Period of world-wide economic growth – From 80: thanks to debt growth elsewhere – Mostly one domain considered (e.g. government) ● UK 1947-1980 – Golden age of capitalism ● US 1929-1943 – 29-33: Mass bankruptcies & rising debts % – 34-37: Austerity – 38-43: Growth thanks to war20 okt 2012 Aug 2012 52/61
  • 53. Debt and Deleveraging – A Critical Analysis skimminglight.net20 okt 2012 Aug 2012 53/61
  • 54. Debt and Deleveraging – A Critical Analysis skimminglight.net Graph conflicts with other, publicly available data See e.g. http://www.usgovernmentspending.com & http://www.treasurydirect.gov20 okt 2012 Aug 2012 54/61
  • 55. Debt and Deleveraging – A Critical Analysis skimminglight.net Behind the deleveraging graph...20 okt 2012 Aug 2012 55/61
  • 56. Debt and Deleveraging – A Critical Analysis skimminglight.net20 okt 2012 Aug 2012 56/61
  • 57. Debt and Deleveraging – A Critical Analysis skimminglight.net20 okt 2012 Aug 2012 57/61
  • 58. Debt and Deleveraging – A Critical Analysis skimminglight.net Proposed Policy20 okt 2012 Aug 2012 58/61
  • 59. Debt and Deleveraging – A Critical Analysis skimminglight.net Ma 1.“Policy makers should work toward developing an international system for tracking leverage at a granular k eb sector level across countries and over time.” 2.“Bank executives should adjust their internal risk models orr to reflect leverage in sectors of the real economy.” ow economy. “ 3.“Macroprudential policy should also reflect leverage in ingreassess the need for further specific sectors of the real rapid increases in bank capitalm 4.“Financial regulators should otoe pockets of ratios.” 5.“Monetary policy makers should act r prevent leverage.” dif fic 6.“Tax preferences for debt, and especially for real estate lending, should be revisited.” ult 7.“Regulators should also revisit the broader set of ! incentives for households taking on debt”20 okt 2012 Aug 2012 59/61
  • 60. Debt and Deleveraging – A Critical Analysis skimminglight.net Conclusion20 okt 2012 Aug 2012 60/61
  • 61. Debt and Deleveraging – A Critical Analysis skimminglight.net Conclusion ● Ideological report ● Answer needed – Current situation ● Systemic crisis ● Addicted to cheap money ● Limits reached ● Deepening tensions – Alternative ● Socialize economy20 okt 2012 Aug 2012 61/61