What normally happens when debt ratios are higher?

- "We look at the world as a whole. It will now be characterised by a higher private sector and public sector debt ratio, due to:
• the increase in private debts in OECD countries prior to the crisis;
• the fiscal deficits created during the crisis;
• the rapid increase in credit in most emerging countries."
- "What consequences can normally be expected from a high public and private debt ratio?
• an effort to reduce debts (rise in household savings, increase in profits and decline in corporate investments, primary budget surpluses), leading to a weakening in demand for goods and services;
• a distortion of income sharing at the expense of wage earners, due to companies’ efforts to reduce their indebtedness;
• a fall in inflation and risk-free interest rates;
• a rise in risk premia priced into interest rates."

Natixis Flash Economics 394 20100806

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