Understanding debt ratios

We examine the total debt ratio trends for the world and for OECD countries. We note: For the global debt ratio, a continual increase from 1997 until now; For the OECD's debt ratio, an increase from 1996 to 2009, then a gradual decline. How can these trends be explained? At equilibrium, savings are equal to investment, and the cumulative stock of savings is equal to the stock of capital. The cumulative savings can provide capital financing either by purchasing capital shares (equity), or via debt. An increase in the debt ratio is therefore the result of an increase in the proportion of savings that finances investment via debt and not equity: if all capital financing were in the form of equity, there would be no debt. Deleveraging is therefore the result of debt being less attractive for capital financing: a more restrictive monetary policy, increased default risk, stricter regulation of financial intermediaries, etc.