From bust to boom: How the world became addicted to debt

$27 trillion. That's the amount global public debt has grown by since the financial crisis gripped the world eight years ago, according to the McKinsey Global Institute. 

By and large, the story of the world economy has been one in which emerging markets have loaded on debt, while the developed world has struggled to reduce the burdens it amassed in the wake of banking bail-outs and years of stagnant economic growth. 

The Bank of International Settlements calculates government debt in G7 countries has grown by 40 percentage points to 120pc of GDP since 2007. 

China's total debt has quadrupled since 2007, rising to $28 trillion from just $7 trillion before the crisis. At 282pc, China’s debt as a share of economic output is now larger than the United States, and is only surpassed by Japan. 

With the global indebtedness reaching its highest level in 200 years, the IMF has warned the world will need a wave of defaults, savings taxes and higher inflation to finally clear the way for recovery.

IMF paper warns of 'savings tax' and mass write-offs as West's debt hits 200-year high

Much of the Western world will require defaults, a savings tax and higher inflation to clear the way for recovery as debt levels reach a 200-year high, according to a new report by the International Monetary Fund. 

The IMF working paper said debt burdens in developed nations have become extreme by any historical measure and will require a wave of haircuts, either negotiated 1930s-style write-offs or the standard mix of measures used by the IMF in its “toolkit” for emerging market blow-ups.

The paper says the Western debt burden is now so big that rich states will need same tonic of debt haircuts, higher inflation and financial repression - defined as an “opaque tax on savers” - as used in countless IMF rescues for emerging markets. 

Financial repression can take many forms, including capital controls, interest rate caps or the force-feeding of government debt to captive pension funds and insurance companies. Some of these methods are already in use but not yet on the scale seen in the late 1940s and early 1950s as countries resorted to every trick to tackle their war debts. 

The policy is essentially a confiscation of savings, partly achieved by pushing up inflation while rigging the system to stop markets taking evasive action. The UK and the US ran negative real interest rates of -2pc to -4pc for several years after the Second World War. Real rates in Italy and Australia were -5pc.

Austria is fast becoming Europe's latest debt nightmare

Ah Austria, land of schnitzel, lederhosen, Mozart, alpine meadows and beer drinking. Less widely appreciated is its special place in the history of catastrophic banking crises. 

It was the failure of Creditanstalt, a Viennese bank founded in 1855 byAnselm von Rothschild, that arguably sparked the Great Depression, setting off an unstoppable chain reaction of bankruptcies throughout Europe and America. 

No-one would think that what happened last week at Austria’s failed Hypo Alpe-Adria Bank International falls into quite the same category; we are meant to be in the recovery phase of the latest global banking crisis, so this is more about re-setting the system than again bringing it to its knees, right? 

Well, make up your own mind. I suspect neither financial markets nor policymakers have yet caught onto the full significance of the latest turn of events. 

In Hypo’s case, the bail-in also threatens knock-on consequences for public bodies elsewhere, including Bayern Landesbank, a big holder of Hypo bonds which is owned by the German state of Bavaria, and the Munich based FMSW, which is again publicly underwritten. 

All this is just the tip of the iceberg; Europe is awash with interlinked banking and public liabilities, many of which will never be repaid and basically need to be written off. 

Massive creditor losses are in prospect. The European authorities had us all half convinced that Europe’s debt crisis was over. In truth, it may have barely begun.

DYI Comments:  No doubt additional problems await Europe as the EU tightropes keeping the union together.  This has pounded down security prices of your leading European companies as their average yield is at a competitive 4.33% as compared to the S&P 500 of 1.92%.  DYI's favorite is Vanguard's European Stock Index Fund symbol VEUSX. Recommend dollar cost averaging only; with the U.S. market at nose bleed levels any meaningful sell off will drop European markets, at least temporally.

DYI