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Opinion

Managing Debt in an Overleveraged World

By A. Michael Spence

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...the right kind of public investment would probably spur more private-sector investment. Identifying such investment is where today’s debt debate should be.

What ever happened to deleveraging? In the years since the 2008 global financial crisis, austerity and balance-sheet repair have been the watchwords of the global economy. And yet today, more than ever, debt is fueling concern about growth prospects worldwide.

The McKinsey Global Institute, in a study of post-crisis debt trends, notes that gross debt has increased about $60 trillion – or 75% of global GDP – since 2008. China’s debt, for example, has increased fourfold since 2007, and its debt-to-GDP ratio is some 282% – higher than in many other major economies, including the United States.

A global economy that is levering up, while unable to generate enough aggregate demand to achieve potential growth, is on a risky path. But to assess how risky, several factors must be considered.

Read the full article as published in Project Syndicate.

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A. Michael Spence is a William R. Berkley Professor in Economics & Business.