In the aftermath of the 2008 global financial crisis, households and businesses in the United States deleveraged, and have thus far managed to keep debt levels relatively restrained. In contrast, private sector leverage has risen spectacularly – in both absolute and momentum terms – in countries like Australia, Canada, South Korea, and France, and in smaller economies like Denmark, Norway, and Sweden. In China, decades of unproductive investment and unrestrained credit creation have left policymakers struggling to manage ballooning debt burdens across the financial system.

If global liquidity conditions worsen and borrowing costs remain stubbornly elevated, we suspect these vulnerabilities could upend post-2000 currency market dynamics. Central banks in over-indebted developed-market economies could be forced into cutting rates more dramatically than the Fed as increasingly-constrained households cut spending and businesses slash investment. With authorities in China working to provide stimulus while avoiding a melt-up in property markets, commodity demand might remain relatively subdued – particularly in comparison with the 2009 episode – contributing to a slowdown in major emerging market economies.

Total credit to private non-financial sector, % share of gross domestic product, Q1 2000 – Q4 2022