The earth goes further and further into the debt. Even the GFC didn’t cure us of our credit addiction. Where will it all end?
Apparently the earth is now $200 trillion dollars in debt.
And Jupiter is coming to collect.
It’s a funny statistic, and it’s strange to think about the whole world being in debt. But this is how the global economy works.
But we’re not borrowing from other planets. There’s no line of credit from the Bank of Venus. We’re borrowing from ourselves.
From our future selves.
You’ve got to admire human ingenuity. We’ve constructed a system where we can draw down future production and earnings, and spend them in the present day.
Effectively the whole world’s working on “I’m getting paid next week. I’ll fix you up then.”
This is the basics of the lending model. I’ll lend you $1 today, if you give me $2 tomorrow.
Tomorrow, tomorrow, I love you, tomorrow
And in the modern era, everyone’s in on it. Banks are lending to governments. Governments are lending to households. Banks are lending to non-bank financial institutions.
Credit is the oil of the capitalist machine.
Is that a bad thing?
Not necessarily. Personally, I’m a big fan. My fortune has been built on leverage. If I had to buy my first property outright I’d still be saving for it.
Who’d be writing these blogs then?
And credit, as a tool in the modern human’s tool kit (up there with the wheel and agriculture) has allowed us to enjoy a far greater level of prosperity that would have otherwise been possible.
And with that, it has helped raise millions of people out of poverty – and the misery, disease and death that come with destitution.
But of course, not all debt is the same. We can understand this at a household level. Borrowing to buy a shiny new stereo is not the same as borrowing to invest in an income-producing asset like property, or even to invest in your own skills – like a Uni degree.
One type of borrowing sets your future-self up with greater earning potential to pay back the debts you owe. The other leaves your future-self grumbling about how you always get it in trouble.
Same story with government debt. There’s a role for borrowing to build the productive capacity of the economy. Investment in infrastructure, roads, communications etc. can all build the economic potential of the future.
This potential, realised through increased tax revenues, can make it a positive proposition for the government just on purely economic grounds.
But borrowing to throw pork at the electorate or bribe them off with tax-cuts does nothing to build national wealth. It’s an entirely different story.
(I don’t really care what level the budget deficit or surplus is. The real question is whether we’re spending the money wisely or not.)
And there’s good and bad debt in the financial sector as well. It’s one thing to invest in a company with good earning potential – giving them the capital to invest in a new factory and expand production.
It’s another to take leveraged bets on opaque financial instruments (like sub-prime mortgage back securities), or speculate in hot markets.
There is good debt, and bad debt.
And sadly, on the face of it, you’d have to think that the global balance is tipping further and further towards bad debt.
McKinsey and co. have estimated that global debt has risen by $57 trillion since the GFC – to just under $200 trillion today.
If debt was the scoundrel that unleashed the GFC on the world, should we be worried that debt is going up, not down.
The answer to that is really whether it’s been good debt or bad debt.
It’s hard to know exactly, but on the face of it, it doesn’t look good. Debt has risen over 40% since the GFC. Global output growth though has risen, what, 20% tops?
So debt is growing twice as fast as production.
To me that seems to suggest that there’s a lot of speculation going on here. Either people think that some real boom times are coming in the near future (which I doubt), or everyone’s just getting back on the credit sauce.
And it is a global phenomenon. All major economies today have higher levels of borrowing relative to GDP than they did in 2007. Global debt to GDP has risen by 17 percentage points.
Worryingly, almost half of it is government debt, which has grown by $25 trillion since 2007. In 10 of the countries they studied, it exceeded 100% of GDP.
But household debt is also “reaching new peaks”. Only Ireland, Spain, the UK and the US have deleveraged at the household level. In advanced economies such Australia, Canada and Denmark, it now exceeds pre-GFC levels.
But you’d have to think this is one of the natural consequences of the QE era. When credit is cheap – or effectively free for some participants in some markets – then you would expect people to take on more credit.
The cost of serving that credit has obviously fallen.
But the flip-side of that is that when credit is super-cheap, there’s less incentive to use it wisely. Just throw it any market showing signs of growth. Invent some new-fangled financial instrument to throw the dice on. New footy fields for everyone!
The tower of debt keeps growing. With each new layer the dangers grow and we have further to fall. More than ever we need prudent lending practices and tight credit criteria, and mechanisms to ensure that money flows into productive activity.
If that sounds like a lot to ask for, it’s because it is.
Watch this space closely.