Against the tide: The stock and flow of economic recovery

The rate of global economic decline has peaked but the world economy is still contracting. Deleveraging has a long way to go and the debt overhang will restrict the pace of any subsequent economic recovery.

The core problem remains the overwhelming burden of debt throughout the financial system and the continuing incapacity of borrowers to service it. This concept of stock and flow is central to how investors need to think about recovery. The authorities have done much to ease the short-term flow issues (debt service, etc) by borrowing from future generations to bail out today’s. This has prevented systemic implosion and explains why equity markets are off their lows.

But this has failed to address, and in many ways has compounded, the stock (of debt) issue. Large debts per se need not be problematic. Many of us live in homes we cannot afford to...