Global Debt Is MORE THAN TWICE AS BIG As the Entire World Economy… What Does It Mean?
Washington's Blog
March 3rd, 2015
The Guardian reports that global debt has grown by $57 trillion dollars – to $199 trillion dollars – since the 2008 financial crisis.
How much is that? It’s a big number … but what does it actually mean?
The Guardian notes that global debt is now more than twice the size of the entire global economy:
Total debt as a share of GDP stood at 286% in the second quarter of 2014 compared with 269% in the fourth quarter of 2007.
(That’s more than 2.8 times the size of the world economy).
And it will only keep getting worse:
Government debt-to-GDP ratios will to continue to rise over the next five years in a number of countries including Japan, the US and most European countries ….
While the mainstream press talks about “deleveraging,” the fact is that many households are going deeper into debt:
Household debt is “reaching new peaks”. Only in Ireland, Spain, the UK and the US have households deleveraged. According to the study, not only have household debt-to-income ratios continued to rise, they now actually exceed the peak levels in the crisis countries before 2008 in some cases, including advanced economies such Australia, Canada and Denmark.
Why Should We Care?
It has been known for a very long time that debt grows exponentially, while economies only grow in an s-curve. As such, debt will always overtake prosperity unless measures are taken to reduce it.
In 2008, the most prestigious financial agency in the world – the Bank for International Settlements (BIS), often described as the “central bank for central banks” – said that failing to force companies to write off bad debts “will only make things worse”.
Moreover:
The recent edition of the Geneva report – “an annual assessment informed by a top drawer conference of leading decision makers and economic thinkers” – finds that the “poisonous combination” of spiraling debts and low growth could trigger another crisis. The report also notes:
Contrary to widely held beliefs, the world has not yet begun to de-lever and the global debt to GDP ratio is still growing, breaking new highs.
And as the Telegraph put it last year:
On a global level, growth is being steadily drowned under a rising tide of debt, threatening renewed financial crisis, a continued squeeze to living standards, and eventual mass default.
Top economists that Iceland did it right … and everyone else is doing it wrong. Here’s why:
Arni Pall Arnason, 44, Iceland’s minister of economic affairs, says the decision to make debt holders share the pain saved the country’s future.
Even the IMF points to Iceland as a model for debt write-offs as a way out of its economic slump.
And – despite the fact that mainstream “neoclassical” economists don’t believe that debt even “exists” as a force that acts on the economy – many economists note that high levels of private debt cause depressions.
Indeed, an economics professor who bases his analysis on computer models says we’ll have “a never-ending depression unless we repudiate the debt, which never should have been extended in the first place”.
Well-known economist Michael Hudson agrees (starting around 4:00 into video):
If the problem that is grinding the economy to a halt is too much debt, and if no one in the government – in either party – is looking at solving the debt problem, then … we’re going to go into a depression as far as the eye can see.
And high levels of debt lead to war. For example, Martin Armstrong argued that war plans against Syria are really about debt and spending:
The Syrian mess seems to have people lining up on Capital Hill when sources there say the phone calls coming in are overwhelmingly against any action. The politicians are ignoring the people entirely. This suggests there is indeed a secret agenda to achieve a goal outside the discussion box. That is most like the debt problem and a war is necessary to relieve the pressure to curtail spending.
Billionaire investor Jim Rogers agrees:
“Add debt, the situation gets worse, and eventually it just collapses. Then everybody is looking for scapegoats. Politicians blame foreigners, and we’re in World War II or World War whatever.”
So do many other top economic advisers.
The Wrong Prescription
The central banks’ central bank warned in 2008 that bailouts of the big banks would create sovereign debt crises. That is exactly what has happened.
Remember, it is not the people or Main Street who are getting bailed out … it is the giant banks.
A study of 124 banking crises by the International Monetary Fund found that propping up banks which are only pretending to be solvent – instead of forcing them to write off their bad debt – often leads to austerity:
Existing empirical research has shown that providing assistance to banks and their borrowers can be counterproductive, resulting in increased losses to banks, which often abuse forbearance to take unproductive risks at government expense. The typical result of forbearance is a deeper hole in the net worth of banks, crippling tax burdens to finance bank bailouts, and even more severe credit supply contraction and economic decline than would have occurred in the absence of forbearance.
Cross-country analysis to date also shows that accommodative policy measures (such as substantial liquidity support, explicit government guarantee on financial institutions’ liabilities and forbearance from prudential regulations) tend to be fiscally costly and that these particular policies do not necessarily accelerate the speed of economic recovery.
***
All too often, central banks privilege stability over cost in the heat of the containment phase: if so, they may too liberally extend loans to an illiquid bank which is almost certain to prove insolvent anyway. Also, closure of a nonviable bank is often delayed for too long, even when there are clear signs of insolvency (Lindgren, 2003). Since bank closures face many obstacles, there is a tendency to rely instead on blanket government guarantees which, if the government’s fiscal and political position makes them credible, can work albeit at the cost of placing the burden on the budget, typically squeezing future provision of needed public services.
In other words, the “stimulus” to the banks blows up the budget, “squeezing” public services through austerity.
But instead of throwing trillions at the big banks, we could provide stimulus to Main Street. It would work much better at stimulating the economy by wiping out some of the little guy’s debt.
Instead of imposing draconian austerity, we could stop handouts to the big banks, stop getting into imperial military adventures and stop incurring unnecessary interest costs (and see this).
And bondholders – rather than the little guy – must be forced to take a haircut.
The Solution Has Been Known For Over 4,000 Years
READ MORE
- See more at:
http://www.thedailysheeple.com/global-debt-is-more-than-twice-as-big-as-the-entire-world-economy-what-does-it-mean_032015#sthash.fQPo8YsG.dpuf
