In the US, for example, public debt increased by $ trillion from the end of 2008, with the ratio of public debt to GDP rising from about 74% to the current 100%. Another striking example was Japan where the public-debt-toGDP ratio surged from an already precarious level of around 190% in 2008 to almost 240% in 2012, and is expected to rise even further to over 250% by 2020 along with still more fiscal stimulus under “Abenomics”. In terms of private-sector debt, while the US and the UK underwent more significant private-sector deleveraging, most European countries showed little progress on the reduction in private-sector indebtedness. The weak peripheral countries aside, even in core countries like France, the private non-financial sector debt ratio increased sharply from about 200% of GDP at the end of 2008 to 230% of late. 7. There are many narratives on why this trend of rising indebtedness has occurred. Perhaps the financial “deepening” had made credit much easier and cheaper for many households and corporates to obtain. Or, financial innovation in the form of securitisation and financial derivatives, such as CDS and CDOs, enabled leverage to be amplified and distributed throughout the financial system and beyond. But, the cause of this alarming trend is not the issue. The point I wish to make is that most people had become insensitive to the excessive levels of indebtedness and leveraging, and the resulting imbalances and vulnerabilities that had built up prior to the Global Financial Crisis and the European Sovereign Debt Crisis.
In Europe, the situation is even more disheartening, given the fact the output of many peripheral countries and the UK and France is not yet back to pre-crisis levels. Again, when faced with criticisms that the central banks had gone beyond their remit and capabilities by taking up the role of supporting economic growth, mainstream thinking argued that, even though QE was not as potent as it was hoped, the economic conditions post-crisis would have been a lot worse without these unconventional monetary policies. At this juncture, based on the empirical evidence available so far, it is hard to judge one way or the other whether the unconventional monetary policies have worked, or will work. 15. However, it should not take long to find out the answer. This is the fifth year of QE in the US; and the main issue now is not to what extent QE has helped economic recovery since 2009, but what happens when the Fed actually exits from these accommodative policies. Of course we don’t know exactly when the Fed will exit, which entails three stages: tapering in the asset purchase programme, ending the purchase programme and eventually raising policy rates. Chairman Bernanke and some FOMC members have made it clear the timing of these stages is still uncertain as it will depend on the actual pace of economic recovery and improvement in the job market. The three stages have long been known to the markets and are nothing new.