WHEN does the level of debt in an economy become “too much”? It is a very hard question to answer, not least because debt is a highly useful tool, allowing business to invest for the future and consumers to smooth their spending over the course of their lives. To a degree, a higher level of debt is a sign of the greater sophistication of an economy.
In a report, BCA Research defined the period since the Second World War as a “debt supercycle” in which debt levels have inched persistently higher. This trend has been driven by the use of monetary policy to stabilise the economy in the wake of shocks, such as the 23% fall in the Dow Jones Industrial Average on October 19th 1987. “Policymakers were always able to limit the economic and financial damage of recessions and other shocks by easing policy enough to trigger a new private-sector leverage cycle”, BCA writes.
economist.com