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How the Global Debt Will Destroy All Economic Gains

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NEW YORK – February 22, 2019

The world economy has gone through various stages of its development, but now it’s actually in a dead end, and the consequences of enormous incentives in the end could nullify the achievements of recent decades.

Bill Gates recently tweeted a chart (see below) that showed the percentage of the world population living in extreme poverty since 1820. Thankfully, there has been a tremendous improvement in the past two centuries – 94.4% of humans lived in extreme poverty in 1820 versus only 9.6% in 2015. Of course, this chart started a lively debate about the reasons for this improvement, whether the definition of extreme poverty is correct, and so on.

How the Global Debt Will Destroy All Economic Gains

But it seems to me that this discussion cannot fully cover the scale of the problem. In this context, Jesse Colombo seems to be correct, who offers to add one more point. There is a very real risk that soaring global debt will cause another severe economic crisis (likely a full-blown depression), which will reverse a portion of the gains made in poverty reduction, cause geopolitical instability, unrest, wars, and other unpleasant side-effects.

In recent years, the world's central banks have pumped the world economy with cheap money. Their main goal was to reduce the rates in the debt market so that companies could borrow at a low interest rate and thereby finance their activities.

However, the scale of cash infusions exceeded all possible expectations, as a result even absolutely inefficient companies, in other words, zombie companies, were able to attract loans.

And in general, almost everyone who could and wanted to borrow, did it to the fullest.

Global debt has surged by nearly $150 trillion since 2003 and $70 trillion since 2008. As bad as the 2008 global financial crisis was, the next crisis will hit the global economy even harder simply due to the fact that an additional $70+ trillion in debt has been added. That means that governments and central banks have far less firepower with which to stabilize their economies in the next crisis.

How the Global Debt Will Destroy All Economic Gains

In most major economies, debt has been growing at a faster rate than the underlying GDP:

How the Global Debt Will Destroy All Economic Gains

The debt binge of the past several decades caused global debt as a percentage of GDP to reach an all-time high of 225% in recent years (see black line):

How the Global Debt Will Destroy All Economic Gains

What the regulators have not tried in recent years: negative interest rates, LTRO, and even ETF purchases carried out by the Bank of Japan, which has nothing more to buy.

In addition, it is important to note that the central banks are trapped. They cannot normalize their policies even if they wanted to, since a rise in interest rates will lead to an explosion of a debt bubble. Now companies and countries can refinance their huge debts so far, but with an increase in interest rates, this will already be too expensive, which means that debts will have to be paid: This is simply impossible; the debt load is too high.

The growing debt burden will stifle economic growth, which will further complicate attempts to escape from this debt pit. Eventually, global debt saturation will lead to a downward spiral situation in which nearly all central banks will be forced to debase (or “print”) their fiat/paper currencies at an extremely high rate in order to pay the interest on debt and to keep their economies afloat for a little while longer. It is enough to look at the latest statements of the Bank of Japan, which is ready for new incentives, the ECB, which does not exclude such a development of the situation, the People's Bank of China and, of course, the Federal reserve system.  Humanity is going to pay the price for borrowing to create economic growth.

Author: USA Really