WHEN does the level of debt in an economy become “too much”? It is a very hard question to answer, not least because debt is a highly useful tool, allowing business to invest for the future and consumers to smooth their spending over the course of their lives. To a degree, a higher level of debt is a sign of the greater sophistication of an economy. In a report, BCA Research defined the period since the Second World War as a “debt supercycle” in which debt levels have inched persistently higher. This trend has been driven by the use of monetary policy to stabilise the economy in the wake of shocks, such as the 23% fall in the Dow Jones Industrial Average on October 19th 1987. “Policymakers were always able to limit the economic and financial damage of recessions and other shocks by easing policy enough to trigger a new private-sector leverage cycle”, BCA writes.

Now BCA thinks the debt supercycle has come to an end. This is not because the overall level of debt has fallen; indeed, if one excludes the financial sector, the global level is still rising (see chart). But in the developed world, monetary policy has failed to create a credit boom in the private sector, even with the help of zero short-term interest rates.

Before the 2007-2008 crisis, mainstream economists did not seem to pay a lot of attention to debt. The view seemed to be that any loss to creditors would be cancelled out by gains to debtors; net world debt is zero, as a wag recently tweeted. But this view has been shown to be fundamentally wrongheaded in the last seven years.

The first problem is that a lot of debt is secured against property. The late Hyman Minsky, an economist, argued that this relationship would naturally lead to bubbles, as easier credit standards pushed up property prices and higher prices encouraged banks to offer easier credit terms.

But when property prices fall, both the debtor and the creditor can suffer; the debtor loses his equity while the creditor has to write down the value of the loan. This is exactly what happened in 2007 and 2008 as house prices fell. Individual homeowners lost their wealth and their homes; banks saw their capital eroded.

In their book “House of Debt”, economists Atif Mian and Amir Sufi show that those parts of America which were worst hit by the crisis were those where the equity stakes of homeowners were lowest. This was not a zero sum game.

In addition, the higher the debt level, the more debt has to be refinanced each year, and the greater the potential for a crisis of confidence if creditors are unwilling to extend the loans. So while there is no magic threshold for the ratio of debt to GDP, beyond which economic growth is slower and default is certain, the risks increase as the ratio grows.

Another problem is that the debt ratio is very hard to bring down in the absence of rapid economic growth, which the western world has found hard to generate. Default simply causes the debt to be reshuffled; when consumers fail to repay, banks must be rescued so the debt ends up on the government’s books. Inflation might bring down the debt-to-GDP ratio but only if creditors can be hoodwinked (or bullied) into not demanding higher yields to compensate. In any case, inflation is hardly the issue; the euro-zone is now in deflation, with the headline rate falling 0.2% in the year to December thanks to falling energy prices (the core rate, which excludes energy, food, alcohol and tobacco is still positive, at 0.8%).

For now, the developed world has reached a fragile stasis in which a high level of debt is only sustainable with very low interest rates. Any attempt to push up rates to what were once normal levels is fraught with danger; Sweden, which started down the path in 2010, has had to cut rates back to zero.

But the tricky question is whether significant economic growth is achievable in the absence of rapid debt expansion. Consumers will not want to borrow unless their wages are rising, but real wage growth has been sluggish; companies will not want to borrow until they see signs of buoyant consumer demand. And governments are unwilling or unable to provide another burst of stimulus.

In sailing terms, it is rather like the doldrums, a patch of ocean where boats become becalmed. Japan has been in the doldrums for more than a decade and has managed not to sink. But Japan is a relatively homogeneous society. Other developed nations might not be so lucky. Greece, which may vote for a debt-repudiating government on January 25th, will be the first test.

Economist.com/blogs/buttonwood