Global Debt Is Almost 3 Times As Big As the World Economy

March 5th, 2015
in Op Ed

by Washington's Blog, Washington's Blog

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?

Follow up:

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

Periodic debt forgiveness - or debt "jubilees" - were a basic part of the original Jewish, Christian, Babylonian and Sumerian cultures. Indeed, this tradition goes back over 4,000 years ...

In fact, many of the major religions were founded on the concept of debt forgiveness.

For example, Matthew 6:12 says:

And forgive us our debts, as we forgive our debtors.

Anthropologist David Graeber, author of "Debt: The First 5,000 Years", says:

If you look at the history of world religions, of social movements what you find is for much of world history what is sacred is not debt, but the ability to make debt disappear to forgive it and that's where concepts of redemption originally come from.

Reverend Howard Bess writes:

According to the Israelite tradition, their God, Yahweh, laid down strict rules about the land which was distributed by priests to the clans of Israel, but Yahweh retained the title to the land. Leviticus 25:23 states the principle: "The land shall not be sold in perpetuity; for the land is mine; with me, you are but aliens and tenants."

The use of the land given to Israelites was conditioned. The tenant was obligated to care for the needs of priests, aliens, widows and orphans. Then every 50 years a great redistribution was to take place. All land was to be returned to the priests and reassigned to new tenants. At the same time, all debts were canceled and all slaves were set free.

There is no record that these provisions of Torah were ever practiced. After all, wealth and ownership are addicting; ownership becomes obsessive. Israelites forgot about the 50th year distribution as well as their commitment to generosity.

Wealth grew and the poor became poorer and more desperate. According to the Gospel tradition (Luke 4:18), Jesus from the beginning of his teaching demanded/announced a reestablished year of Jubilee (a 50th year redistribution). Only when these teachings of Jesus are put into the context of the Galilean rural poor of the first century CE, can the radical commitment of Jesus to this world be fully appreciated.

Freedom from debt is also the basis of liberty ... After all, the first recorded word for "freedom" in any human language is the word for freedom from debt.

Both founding father Thomas Jefferson and the father of free market economics Adam Smith warned that every generation should pay off its own debts.

And this a very timely and current issue ...

Respected economic writer Ambrose Evans-Pritchard wrote in 2009:

In the end, the only way out of all this global debt may prove to be a Biblical debt Jubilee.

Well-known economist Nouriel Roubini writes in the Financial Times:

Since this is a crisis of solvency as well as liquidity, orderly debt restructuring must begin. This means across the board reduction on the mortgage debt for the roughly half of America's households that are underwater ....

Martin Armstrong notes:

"At the end of every seven years you shall grant a remission of debts." Deuteronomy 15:1, which is the manner of remission where every creditor shall release what he has loaned to his neighbor.

***

Historically, society is destroyed by debt every time.

***

Absolutely no nation has ever survived a debt crisis.

***

So should we have a debt forgiveness every 7 years? Perhaps that prevents the crash and burn in the [business cycle]. Interesting correlation. Could this be an ancient mechanism to lower the volatility of the ... business cycle? .... Interesting wisdom indeed.

Sprott's Jeff Nielsen writes:

As indicated in the chart below (originally produced at Zero Hedge) ... Membership in the international Bankruptcy Club has soared to roughly 40 nations. Canada's previous "debt crisis" would no longer even earn it a place in the world's "top-40" of most-indebted nations today.

***

In collective terms, the unequivocal proof that these regimes must (immediately) declare Debt Jubilee comes in many forms. We start with the fact that none of the members of the Bankruptcy Club ever manage to improve their fiscal standing (i.e. lessen their level of obvious insolvency). While there may be occasional, annual "blips" in the economic self-destruction of these nations; examine the balance sheet of any member of the Bankruptcy Club over five-year increments, and their fiscal position is always worse.

***

Debt Jubilee is a long-standing economic "tradition" of our species, as financial mismanagement (at the national level) is an endemic problem of our species, irrespective of the historical era, or the system of government. Arithmetic is arithmetic. Continuing to (attempt to) "sustain" the unsustainable is at best economic suicide, at worst economic treason.

Moreover, our own sovereign debts are fraudulent, on several different levels. Wiping away these gargantuan debts, and restoring solvency to the Western world is not only economically necessary and morally imperative, it is legally justifiable. The "legal remedy" for fraud is a very simple one: the fraudulent transactions (i.e. our debts and accumulated interest) are instantly rendered null-and-void. For injured parties with "clean hands"; they can seek restitution for any losses through the branch of law known as Equity. Needless to say there would not be any bankers standing in that line.

Clearly if Western governments were 'merely' drowning in debt-to-GDP ratios of roughly 100%, then they could still argue that attempting to manage these debt-loads was legitimate rather than treasonous. However, Germany's government (debt-to-GDP of 188%) can no longer make that claim. Nor can:

Canada's government (221%), Austria's government (225%), the U.S. government (233%), Finland's government (238%), Norway's government (244%), the UK government (252%), Italy's government (259%), France's government (280%), Sweden's government (290%), Denmark's government (302%), Spain's government (313%), the Netherlands' government (325%), Belgium's government (327%), Portugal's government (358%), or Ireland's government (390%).

***

When Western debt-levels began soaring past the point-of-no-return at the beginning of this millennium; it suggested that the West (and thus the whole global economy) was due for the latest Debt Jubilee. When these already-excessive debt levels exploded to a ludicrous level, following the so-called "bail-outs" (to these same bankers) from the Crash of '08; this required an immediate Debt Jubilee. However, the insane/treasonous numbers in the previous, current chart shout out an even simpler message: we demand Debt Jubilee.

Indeed, there is a long-standing legal principle that people should not have to repay their government's debt to the extent that it is incurred to launch aggressive wars or to oppress the people ... what is called "odious debt".

If a debt jubilee is not voluntarily granted, people may very well repudiate their debts ... which would lead to chaos.









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