Creditors versus debtors in the post-lockdown economy
GLOBAL financial imbalances widened in 2019. The gap between creditor and debtor net international investment positions – an economy’s stock of external assets minus liabilities – climbed for a fifth consecutive year to 44% of global GDP. The main reason for this was a sustained rally in global stock markets, with US indices outpacing others, and Federal Reserve interest rate cuts. The S&P 500 jumped 28%. The Europe-focused S&P 350 rose 22% and the Nikkei 21%. The market rally was supported by the Fed’s interest rate cuts as it unwound its nascent interest rate increase cycle, making three rate cuts in the second half of the year. These would have created accounting gains for holders of US fixed income assets. The combination of a booming US stock market and low interest rates tends to widen financial imbalances as foreign holders of US assets see the value of their assets increased, while the US will find the value of its foreign liabilities has risen.