The Economic Turmoil raises the Growing Problem of Indebtedness

The World Economy is currently facing what we could call a credit crunch. The banks are no longer healthy. The years of cheap credit belong to the past. It is time now to analyse what's really going on.
The past ten years have been phenomenal for the banks and the housing market. Unfortunately or fortunately, most of the increase in real estate prices in most developed countries has been totally artificial. Today, the banks pay the price of this great monetary illusion. Let's remember that real estate prices had more than doubled from 1998 to 2007 in countries like France ( +150%), Spain, Ireland or England. On the other hand, Germany and Japan have not faced the housing bubble ( for specific reasons ).

As we've said, most of the rise was non-natural because the rise in salaries had had a slower pace. The rise in housing prices is due to monetary expansion thanks to an apparent cheap cost of credits. This monetary expansion has fueled an unprecedented speculative phenomenon in the housing sector. Some real estate investors who had borrowed money could only reimburse the banks if the prices continued to go up.

In other words, the real estate market had turned into a Casino Economy: it was often buying accomodations to make money.

Robert Peston, a BBC business editor, notes that if you combine Consumer, corporate and public sector debt in the U.K. , the ratio of borrowings to annual economic output is a bit over 300 per cent or more than £4,000 billion. The indicators of indebtedness and its evolution are striking: the gross foreign current liabilities of U.K.'s banks rose from £1,100 billion in 1997 to £4,400 billion this year which represents around three times the size of U.K.'s annual economic output.

This debt is to a large extent the recycled savings of other countries, especially China and its massive surpluses as well as other Asian economies and the Middle East. China detains, today, £1,400 billion in foreign exchange reserves. There is now an imbalance between savings in the East and the indebtedness of major developed countries ( France, U.K. , U.S., Spain...). Western countries tend to generate budget deficits, trade deficits whereas China or India tend to generate massive trade surpluses.

Zhou Xiaochuan, governor of the Chinese central bank warned:"Overconsumption and a high reliance on credit is the cause of the US financial crisis" and " the US should take the initiative to adjust its policies, raise its savings ratio appropriately and reduce its trade and fiscal deficits".