Covid has caused global debt to soar… who is it owed to?
Apparently, the earth is now $388 trillion dollars in debt.
And Jupiter is coming to collect.
There’s been a huge spike in global debt since Covid struck, and most economies have followed Australian into money-printing and massive deficits.
The last time I looked, which was a couple of years ago, it was around the $200 trillion mark, so it’s a pretty massive ramp up.
And this is something that people struggle to get their head arounds. How can the whole world be in debt? How can it not balance out?
But this is how the global economy works.
Because 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 for you 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.
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 this is the what they don’t teach you in school, and what the media misses when they spend so much energy on the headline numbers.
It’s not the size of your debt. It’s what you do with.
It’s true for you as an investor, it’s true for you bank, it’s true for governments…
… and it’s true for the earth.