Cycles of Debt

Abstract

AbstractBetween 1945 and the 1970s, the advanced economies underwent a long period of debt consolidation, facilitated by economic growth, fiscal restraint, and financial repression. Rapid productivity gains in the United States and catch-up growth elsewhere resulted in “thirty glorious years” of growth. Capital controls, credit regulation, and accommodating central banks created a captive market for government debt. Since interest rates remained below growth rates, governments could reconcile social spending with budget balance. Overall, debt-to-GDP ratios fell by more than two-thirds from their postwar highs. The oil shocks of the 1970s then inaugurated a period of slower growth, larger budget deficits, and rising debts. Developing countries, in contrast, started out with lower debt ratios and borrowed more modestly, until the oil shocks reversed these trends. From this point, developing nations borrowed heavily abroad, from money-center banks that recycled petrodollars. This debt cycle ended in tears, with a Latin America debt crisis, painful deleveraging, and poor growth for a decade.