Global Debt: $233,000,000,000,000

Global debt has hit a record high of $233 trillion. Yet the majority of pontificators still do not see any problem.

A common aspect linking economic depressions is that they are preceded by an excessive build-up of debt. Debt is built up during periods of positive social mood, but when mood trends negative, excessive debt becomes destructive as it either has to be repaid or reneged on. A debt deflation spiral is a characteristic of depressions. You would think, therefore, that we should be worried about the fact that global debt continues to grow strongly. Well, incredibly, most people are not.

A recent report from the Institute of International Finance (IIF) calculates current global debt to be U.S $233 trillion. At the end of 2016 it was $216.5. The 7.6% increase from then reflects increasing debt, particularly within the non-financial sectors of France, Switzerland, Turkey, Korea, Hong Kong and Canada. Indeed, as the chart below shows, non-financial sector debt is now the largest, at $68 trillion. Below that is government debt, at $63 trillion, then financial sector debt at $58 trillion, with the household sector coming in $44 trillion.

Debt in all sectors has increased over the last decade but what is particularly striking is the growth in government debt, which has nearly doubled in ten years. By contrast, financial sector debt has increased by only 9% over that time period. And therein lies the great cover-up of the so-called Global Financial Crisis of 2008. Governments and central banks have been more than willing to accept praise for averting, in their words, the “end of the global financial system” at that time. But the reality is that the problem hasn’t gone away. Not at all. All that has happened is that the excessive financial sector debt in 2007 has simply been transferred to excessive government sector debt in 2018.

In fact, the (close to inverse Golden Ratio) 61.9% increase in non-financial corporate sector debt over the last decade could be largely attributed to a period where the cost of debt (interest rates) has been incredibly low — much of that due to Quantitative Easing policies. Governments haven’t caused social mood to roll positively, and debt to increase as a result, but their policies have certainly greased the wheels.

Many don’t see the astronomical level of debt as a problem. Perhaps, over the decades, people have just become so immune to the gargantuan numbers that another few zeroes don’t actually mean anything at all. Some people argue that the level of debt doesn’t matter because “we owe the money to ourselves.” They argue that most of the liability has an asset on the other side, and so increasing debt is actually a sign of the global economy doing well. An article analyzing the IIF report in the Independent newspaper actually, I kid you not, contains this phrase:

“Debt is a form of wealth.”

Is this how far we have come? Is debt now so acceptable that it has been contorted in such a way that excessive debt is no longer seen as dangerous?

The IIF report reveals that, although global debt has grown in nominal terms, it has declined as a percentage of global Gross Domestic Product (GDP). Global debt to GDP now sits at 318%, down from its high of 321% in 2016. In other words, global debt is over three times higher than global income. This is clearly unsustainable and, should the cost of servicing that debt start to rise, it could all unravel very quickly.

This charade can go on only so long as confidence in the actors’ remains elevated. Once that goes, the deflation of this debt mountain will be a wonder to behold.