As we enter another new year, and are bombarded by prognostications concerning everything from the path of economic growth, the S&P 500, Treasury yields, and the future of the Euro, the global economy continues to contend with the deep wounds that were left by the last crisis. While many are ready to declare that the global economy is finally on the mend and the recovery ready to bloom, we ascribe to an alternative view. The current global economic malaise will linger because it is a function of structural, not cyclical, economic considerations.
The global economy, simply, has accumulated too much debt. The underlying debt issues have not been fixed, but have instead been compounded by rolling bailouts and, indeed, more debt. At all levels, debt has not been sufficiently reduced; it has just been moved from one balance sheet to another (think: individual/corporate to banks to sovereign). This debt will restrain growth and make all economies and markets unusually susceptible to shocks. This has vast implications for how risk should be approached for years to come.
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