Are rising debt-to-gross domestic product ratios around the world a sign that another financial crisis is looming? At a recent investment conference, I had a heated debate with an economist who claimed that rising indebtedness across the globe was a sure sign of renewed economic sickness and deterioration. “The Minsky moment will return,” he declared, pounding the table. He singled out China as the place where the next financial collapse would occur. Credit expansion there, he said, had grown “too much, too fast”.

For decades, the debt-to-GDP ratio has been widely used as the key gauge of a nation’s financial vulnerability. Nevertheless, this measure has proved to be misleading. In the mid-1990s, when Japan’s gross ratio approached 120 per cent, many concluded that the country was heading for fiscal ruin, which would inevitably collapse the bond market and the yen, and cause hyperinflation. What has happened since then is that the total ratio has risen to 250 per cent today, while Japanese government bond yields have fallen to zero. Japan has suffered decades of price deflation.

Looking around the world, the levels of interest rates for different countries are negatively correlated with levels of total indebtedness. Countries that have borrowed aggressively — such as Japan, China and Singapore — have very low or zero interest rates. On the other hand, countries that have barely borrowed, including Brazil, Russia and Indonesia, usually pay very high interest rates. This negative correlation is highly significant, disproving the widely held notion that higher debt levels lead to higher risk premia at the macro level.