Caught in a Debt Trap
Lord Adair Turner explored the UK's economic situation during his annual address
Adair Turner, the former Chairman of the UK Financial Services Authority (FSA), has warned that the world is caught in a ‘debt overhang’ during his annual lecture at Cass Business School.
Lord Turner argued that policy makers and commentators have systematically failed to understand how deep deflationary pressures are. He said this pressure is caused by two things; the first he called debt overhang and deleveraging; and the second, long term secular trends.
“The fundamental reason why we had such a huge crisis in 2008 and, in particular, why the recovery from it has been so slow and difficult is the growth of private sector debt in the advanced economies as a percent of GDP. That percentage in 1950 was 50% and it rose relentlessly to reach 170% by 2008”.
Since 2008, there has been no aggregate deleveraging at all, explained Lord Turner. On a macro-economic level, this refers to the simultaneous reduction of debt levels in multiple sectors, including private sectors and the government sector.
Instead, he argued, debt has simply shifted from the private to the public sector and across the world from developed to developing countries, in particular China.
Lord Turner said: “We are caught in a debt overhang from which there will be no escape without some mix of default, debt restructuring or permanent monetisation”.
The full lecture is available to watch on our YouTube channel.
Adair Turner has combined careers in business, public policy and academia. He became Chairman of the UK Financial Services Authority as the financial crisis broke in September 2008, and played a leading role in the redesign of the global banking and shadow banking regulation as Chairman of the International Financial Stability Board's major policy committee.
Lord Turner is now a Senior Fellow of the Institute for New Economic Thinking, a global economic research foundation committed to the development of real world solutions to the economic and social challenges of the 21st century.
His new book “Between Debt and the Devil - credit, money and fixing global finance" will be published by Princeton Press in September 2015.