OPINION: A TRILLION has twelve zero’s. If we were to count a trillion seconds it would take us back 31,700 years. By any measure it is a large number.
$217 trillion is the current estimated size of world debt. Global debt has increased 20% since the onset of the GFC in 2007 through growth in sovereign and private debt.
Sovereign debt has doubled since the onset of the GFC from $30 trillion to $60 trillion because financial organisations have been brought onto government balance sheets whilst large amounts of Quantitative Easing have been undertaken.
There are two issues with sovereign debt:
1) The interest payments are not tax deductible; and
2) What happens if all the taxpayers leave?
Regarding point one, Pakistan is a case in point where government debt to GDP stands at approximately 60 percent. This grew from 3 trillion rupees in 1999 to a little over 14 trillion rupees in 2013. The interest payments and debt repayment schedules alone constitute an excessive burden on government revenue.
As to point two, look at Stockton and Detroit in the United States. Stockton, a town in California with a population of 300,000 where, in 2008, one in thirty houses were in foreclosure and house prices fell 44%. In July 2012, the City of Stockton filed for bankruptcy protection.
Detroit also filed for bankruptcy protection with debts of around $20 billion in July 2013. From a peak population of 1.8 million in the 1950’s, the population fell to 700,000. One third of the City’s budget paid retirement benefits. More than half of the owners of Detroit’s 305,000 buildings did not pay their taxes in 2011 resulting in a revenue shortfall of over $245 million.
In any case, world debt is at unprecedented levels. If global interest rates were to rise substantially, the amount of money paying interest would divert so much money from elsewhere in the economy that it is quite possible a severe recession would ensue.
In time, a combination of inflation and growing GDP are expected to alleviate the worst of the problems – if there is inflation and if there is a resumption in GDP growth.
So, in a highly leveraged world, the prospect of higher interest rates seems unlikely. The ‘lower for longer’ scenario appears to have greater credibility than the ‘resumption of normal transmission’ scenario.
OFFICE/RETAIL/INDUSTRIAL: Investment yields on commercial property can be expected to remain lower for longer.
By Tony Crabb, National Director, Research, Cushman & Wakefield.*
Property Reviewer on Australian Property Journal
