World Debt – Paul Mak

According to the IIF’s Global Debt Monitor report[1], the sum of the debts of households, corporate sector, financial sector and public sector of the global economy has risen to 244 trillion US dollars. What the F#ck?

The total indebtedness of all sectors is now more than triple the total income generated by all citizens. Although it is slightly lower than its historically high level of 320 percent in the third quarter of 2016, it is far away from curtailing the drastic rise in the total global debt within the last decade. The most significant increase is observed in corporate and public sector, where in the last ten years they have increased debt by 76 and 166 %, respectively. While the total debt of households increased by around 30 percent, the financial sector has increased by only 10 percent.

For a better picture, maybe we glance at the debt-to-GDP ratios. Just before the 2008 global financial crisis the total debt-to-GDP ratio was lower than 180 percent; however, after a strong increase within the last decade it is currently hovering around 315 percent. Protectionists would claim this is merely post crisis economic slowdown but thats BS…the gross debt numbers are more than enough to disconfirm this rationalisation. Moreover, relatively slower growth in the global economy and expectations of a further slackness might result in higher debt-to-GDP ratio making the deterioration of the indebtedness worse than expected.

Breakdown of Global Debt across sectors

Public Sector

2008 Q3 = 37t

2018 Q3 = 65t

2018 Q3 (D/GDP ratio) = 83%

Corporate Sector

2008 Q3 = 27t

2018 Q3 = 72t

2018 Q3 (D/GDP ratio) = 92%


2008 Q3 = 35t

2018 Q3 = 46t

2018 Q3 (D/GDP ratio) = 59%

Financial Sector

2008 Q3 = 55t

2018 Q3 = 60t

2018 Q3 (D/GDP ratio) = 77%

The big bank bail out was a joke. We went out, had a few too many drinks, got into a fight, spent too much money and were supposed to go home to face the wife. Only instead of going home, we called her up pretending to be working late at the office, then we went to an afterparty, maxxed out the credit cards, got alcohol poisoning, cheated on the wife with her best friend and now its 11am the next day, youre fired from work, the wife is wondering where you are, youve spent the savings account and now youre really f#cked.

The aftermath of 2009 leaves us more indebted than we were, more reliant and more vulnerable. Government debt in developed economies substantially increased where it accounted for most of the increase in the total debt of developed markets. The debt of emerging markets, in the meantime, tripled. All in all, we have recently experienced a very substantial increase in the indebtedness around the world, which is spread to every sub-sector of the global economy as well as every income group of the economy. This indebtedness is not sustainable and the next recession is going to really hurt.

debt increases since 2008 per sector

To any stock investor it is no surprise that the corporate sector is punching out the worst numbers with an almost 150% increase in debt since 2008. From a top down flow, we see poor stimulus policies funnel cheap money to companies who use cheap tactics to boost cheap numbers. Thats not completely their fault. The system is designed to squeeze strategy towards debt. Companies have to find more debt to rollover their existing debt. Second, they have to grow more to be able to pay their debts. The current economic system requires non-financial firms to incur more debt to grow while also facilitating easy access of the money to finance the debt. Any monkey can see that excessive borrowing and risk taking cannot force sustainable growth if it isnt accompanied by an equal increase in consumption from the household and public sectors.

But these sectors are dealing with inflated debt issues as well. It is unlikely that these sectors will increase their consumptions but if they do the overall global indebtedness issue isnt fixed as the growth in the corporate sector is only achieved at the expense of other segments of the economy.

Dealing with debt by generating more debt obviously wont work. It is my firm belief that growth is the wrong idea and individual prosperity is a better solution. In the next few articles Ill be sort of delving into this. First we need to properly define “growth” in economic terms which ill do in the next article.

Economic Growth

Given the complexity and interconnectedness of the global economy, it is hard to find a starting point for the holistic solution approach. I believe, the most critical word of the current economic and financial system is GROWTH. According to Schmelzer (2014)[2], economic growth has not only been a key element of politicians’ elections campaigns, social scientists and even ordinary citizens of all countries widely acknowledge the pursuit of economic growth as the most essential goal of economic policy. He further states that economic growth, which is summarized in GDP growth, is perceived to be a panacea for all socio-economic challenges and that a healthy growth path paves the way for a better life standard and strengthened national power for all countries. Building on the Kuhn’s original conception of growth paradigm, he firmly stresses that in the current economic system GDP growth is desirable, imperative, and essentially limitless.

The discussion on the indebtedness levels above suggests that growth is not only desirable, but also it is now imperative. However, the important part is the perception of limitless growth and frightening scenario is further exacerbated by the findings of BIS (2011)[3] which i found really interesting. By using data of 18 OECD countries for the period between 1980 to 2010, the study finds that debt becomes a drag on growth after some certain threshold. Particularly, it shows that while government debt-to-GDP ratio beyond 85 percent damages economic growth, 90 percent and 85 percent of GDP are marked as the thresholds for corporate debt and household debt, respectively. According to the percentages discussed above, corporate sector debt-to-GDP ratio is already above the threshold where public sector debt-to-GDP ratio is almost there. The household debt-to-GDP ratio, meanwhile, is getting closer to the critical level as well. In sum, it would be very difficult to find a source for growth that is required to reduce the indebtedness at the global level. The total debt of all sectors in the economy being beyond a threshold of creating growth, we can argue that the world economy might have reached to a limit in growth. Therefore, economic growth can hardly be proposed as a solution to the global debt problem. I will be addressing this and many more concepts as I personally explore my own assumptions and convictions.

Source: Crypto New Media

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