For an upcoming presentation I have been looking at changes in the global debt to equity ratio over the last decade or so. Specifically, I’ve been analyzing the ratio of total global debt – corporates plus government issuance, both domestic and international – versus total world equity market capitalization over the period.
Here is a graphical look at recent trends in the ratio. Interestingly, despite the massive increases in debt issuance in developed countries and despite declining capital markets, on a global basis our debt/equity ratio has declining in the last year. This is, of course, a function more of rapid increases in global equity markets than of debt destruction, and, to a lesser degree it is being driven more by emerging markets than developed markets. Nevertheless, it is worth noting this measure of global financial leverage alongside the usual debt/GDP measure(s).
Finally, this graph is only over the last five years, so I’ll leave it as an exercise for the reader to guess what the global debt/equity ratio looked like in the 1990s and 1980s. Speaking of which, it is always a good party trick to to ask people which is bigger, global debt or global equity markets, and for how long that has been the case.