This Global Debt Bomb Is Ready To Explode
According to the International Monetary Fund, global debt has grown to a staggering grand total of 152 trillion dollars. Other estimates put that figure closer to 200 trillion dollars, but for the purposes of this article let’s use the more conservative number. If you take 152 trillion dollars and divide it by the seven billion people living on the planet, you get $21,714, which would be the share of that debt for every man, woman and child in the world if it was divided up equally.
So if you have a family of four, your family’s share of the global debt load would be $86,856.
Very few families could write a check for that amount today, and we also must remember that we live in some of the wealthiest areas on the globe. Considering the fact that more than 3 billion people around the world live on two dollars a day or less, the truth is that about half the planet would not be capable of contributing toward the repayment of our 152 trillion dollar debt at all. So they should probably be excluded from these calculations entirely, and that would mean that your family’s share of the debt would ultimately be far, far higher.
Of course global debt repayment will never actually be apportioned by family. The reason why I am sharing this example is to show you that it is literally impossible for all of this debt to ever be repaid.
We are living during the greatest debt bubble in the history of the world, and our financial engineers have got to keep figuring out ways to keep it growing much faster than global GDP because if it ever stops growing it will burst and destroy the entire global financial system.
Bill Gross, one of the most highly respected financial minds on the entire planet, recently observed that “our highly levered financial system is like a truckload of nitro glycerin on a bumpy road”.
And he is precisely correct. Everything might seem fine for a while, but one day we are going to hit the wrong bump at the wrong time and the whole thing is going to go KA-BOOM.
The financial crisis of 2008 represented an opportunity to learn from our mistakes, but instead we just papered over our errors and cranked up the global debt creation machine to levels never seen before. Here is more from Bill Gross…
My lesson continued but the crux of it was that in 2017, the global economy has created more credit relative to GDP than that at the beginning of 2008’s disaster. In the U.S., credit of $65 trillion is roughly 350% of annual GDP and the ratio is rising. In China, the ratio has more than doubled in the past decade to nearly 300%. Since 2007, China has added $24 trillion worth of debt to its collective balance sheet. Over the same period, the U.S. and Europe only added $12 trillion each. Capitalism, with its adopted fractional reserve banking system, depends on credit expansion and the printing of additional reserves by central banks, which in turn are re-lent by private banks to create pizza stores, cell phones and a myriad of other products and business enterprises. But the credit creation has limits and the cost of credit (interest rates) must be carefully monitored so that borrowers (think subprime) can pay back the monthly servicing costs. If rates are too high (and credit as a % of GDP too high as well), then potential Lehman black swans can occur. On the other hand, if rates are too low (and credit as a % of GDP declines), then the system breaks down, as savers, pension funds and insurance companies become unable to earn a rate of return high enough to match and service their liabilities.There is always a price to be paid for going into debt. It mystifies me that so many Americans seem to not understand this very basic principle.
On an individual level, you could live like a Trump (at least for a while) by getting a whole bunch of credit cards and maxing all of them out.
But eventually a day of reckoning would come.
The same thing happens on a national level. In recent years we have seen examples in Greece, Cyprus, Zimbabwe, Venezuela and various other European nations.
Here in the United States, more than 9 trillion dollars was added to the national debt during the Obama years. If we had not taken more than 9 trillion dollars of consumption and brought it into the present, we would most assuredly be in the midst of an epic economic depression right now.
Instead of taking our pain in the short-term, we have sold future generations of Americans as debt slaves, and if they get the chance someday they will look back and curse us for what we have done to them.
Many believe that Donald Trump can make short-term economic conditions even better than Obama did, but how in the world is he going to do that?
Is he going to borrow another 9 trillion dollars?
A big test is coming up. A while back, Barack Obama and the Republican Congress colluded to suspend the debt ceiling until March 15th, 2017, and this week we are going to hit that deadline.
The U.S. Treasury will be able to implement “emergency measures” for a while, but if the debt ceiling is not raised the U.S. government will not be able to borrow more money and will run out of cash very quickly. The following comes from David Stockman…
The Treasury will likely be out of cash shortly after Memorial Day. That is, the White House will be in the mother of all debt ceiling battles before the Donald and his team even see it coming.Trump is going to find it quite challenging to find the votes to raise the debt ceiling. After everything that has happened, very few Democrats are willing to help Trump with anything, and many Republicans are absolutely against raising the debt ceiling without major spending cut concessions.
With just $66 billion on hand it is now going to run out of cash before even the bloody battle over Obamacare Lite now underway in the House has been completed. That means that there will not be even a glimmer of hope for the vaunted Trump tax cut stimulus and economic rebound on the horizon.
So we shall see what happens.
If the debt ceiling is not raised, it will almost certainly mean that a major political crisis and a severe economic downturn are imminent.
But if the debt ceiling is raised, it will mean that Donald Trump and the Republicans in Congress are willingly complicit in the destruction of this country’s long-term economic future.
When you go into debt there are consequences.
And when the greatest debt bubble in human history finally bursts, the consequences will be exceedingly severe.
The best that our leaders can do for now is to keep the bubble alive for as long as possible, because what comes after the bubble is gone will be absolutely unthinkable.
The US Government Now Has Less Cash Than Google
Authored by Simon Black via SovereignMan.com,
In the year 1517, one of the most important innovations in financial history was invented in Amsterdam: the government bond.
It was a pretty revolutionary concept.
Governments had been borrowing money for thousands of years… quite often at the point of a sword.
Italian city-states like Venice and Florence had been famously demanding “forced loans” from their wealthy citizens for centuries.
But the Dutch figured out how to turn government loans into an “investment”.
It caught on slowly. But eventually government bonds became an extremely popular asset class.
Secondary markets developed where people who owned bonds could sell them to other investors.
Even simple coffee shops turned into financial exchanges where investors and traders would buy and sell bonds.
In time, the government realized that its creditworthiness was paramount, and the Dutch developed a reputation as being a rock-solid bet.
This practice caught on across the world. International markets developed.
English investors bought French bonds. French investors bought Dutch bonds. Dutch investors bought American bonds.
(By 1803, Dutch investors owned a full 25% of US federal debt. By comparison, the Chinese own about 5.5% of US debt today.)
Throughout it all, debt levels kept rising.
The Dutch government used government bonds to live beyond its means, borrowing money to fund everything imaginable– wars, infrastructure, and ballooning deficits.
But people kept buying the bonds, convinced that the Dutch government will never default.
Everyone was brainwashed; the mere suggestion that the Dutch government would default was tantamount to blasphemy.
It didn’t matter that the debt level was so high that by the early 1800s the Dutch government was spending 68% of tax revenue just to service the debt.
Well, in 1814 the impossible happened: the Dutch government defaulted.
And the effects were devastating.
In their excellent book The First Modern Economy, financial historians Jan De Vries and Ad Van der Woude estimate that the Dutch government default wiped out between 1/3 and 1/2 of the country’s wealth.
That, of course, is just one example.
History is full of events that people thought were impossible. And yet they happened.
Looking back, they always seem so obvious.
Duh. The Dutch were spending 68% of their tax revenue just to service the debt. Of course they were going to default.
But at the time, there was always some prevailing social influence… some wisdom from the “experts” that made otherwise rational people believe in ridiculous fantasies.
Today is no different; we have our own experts who peddle ridiculous (and dangerous) fantasies.
Case in point: this week, yet another debt ceiling debacle will unfold in the Land of the Free.
You may recall the major debt ceiling crisis in 2011; the US federal government almost shut down when the debt ceiling was nearly breached.
Then it happened again in 2013, at which point the government actually DID shut down.
Then it happened again in 2015, when Congress and President Obama agreed to temporarily suspend the debt ceiling, which at the time was $18.1 trillion.
That suspension ends this week, at which point a debt ceiling of $20.1 trillion will kick in.
There’s just one problem: the US government is already about to breach that new debt limit.
The national debt in the Land of the Free now stands at just a hair under $20 trillion.
In fact the government has been extremely careful to keep the debt below $20 trillion in anticipation of another debt ceiling fiasco.
One way they’ve done that is by burning through cash.
At the start of this calendar year in January, the federal government’s cash balance was nearly $400 billion.
On the day of Donald Trump’s inauguration, the government’s cash balance was $384 billion.
Today the US government’s cash balance is just $34.0 billion.
(Google has twice as much money, with cash reserves exceeding $75 billion.)
This isn’t about Trump. Or even Obama. Or any other individual.
It’s about the inevitability that goes hand in hand with decades of bad choices that have taken place within the institution of government itself.
Public spending is now so indulgent that the government’s net loss exceeded $1 trillion in fiscal year 2016, according to the Treasury Department’s own numbers.
That’s extraordinary, especially considering that there was no major war, recession, financial crisis, or even substantial infrastructure project.
Basically, business as usual means that the government will lose $1 trillion annually.
Moreover, the national debt increased by 8.2% in fiscal year 2016 ($1.4 trillion), while the US economy expanded by just 1.6%, according to the US Department of Commerce.
Now they have plans to borrow even more money to fund multi-trillion dollar infrastructure projects.
Then there’s the multi-trillion dollar bailouts of the various Social Security and Medicare trust funds.
And none of this takes into consideration the possibility of a recession, trade war, shooting war, or any other contingency.
This isn’t a political problem. It’s an arithmetic problem. And the math just doesn’t add up.
The only question is whether the government outright defaults on its creditors, defaults on promises to its citizens, or defaults on the solemn obligation to maintain a stable currency.
But of course, just like two centuries ago with the Dutch, the mere suggestion that the US government may default is tantamount to blasphemy.
Our modern “experts” tell us that the US government will always pay and that a debt default is impossible.
Well, we’re living in a world where the “impossible” keeps happening.
So it’s hard to imagine anyone will be worse off seeking a modicum of sanity… and safety.
Do you have a Plan B?
In the year 1517, one of the most important innovations in financial history was invented in Amsterdam: the government bond.
It was a pretty revolutionary concept.
Governments had been borrowing money for thousands of years… quite often at the point of a sword.
Italian city-states like Venice and Florence had been famously demanding “forced loans” from their wealthy citizens for centuries.
But the Dutch figured out how to turn government loans into an “investment”.
It caught on slowly. But eventually government bonds became an extremely popular asset class.
Secondary markets developed where people who owned bonds could sell them to other investors.
Even simple coffee shops turned into financial exchanges where investors and traders would buy and sell bonds.
In time, the government realized that its creditworthiness was paramount, and the Dutch developed a reputation as being a rock-solid bet.
This practice caught on across the world. International markets developed.
English investors bought French bonds. French investors bought Dutch bonds. Dutch investors bought American bonds.
(By 1803, Dutch investors owned a full 25% of US federal debt. By comparison, the Chinese own about 5.5% of US debt today.)
Throughout it all, debt levels kept rising.
The Dutch government used government bonds to live beyond its means, borrowing money to fund everything imaginable– wars, infrastructure, and ballooning deficits.
But people kept buying the bonds, convinced that the Dutch government will never default.
Everyone was brainwashed; the mere suggestion that the Dutch government would default was tantamount to blasphemy.
It didn’t matter that the debt level was so high that by the early 1800s the Dutch government was spending 68% of tax revenue just to service the debt.
Well, in 1814 the impossible happened: the Dutch government defaulted.
And the effects were devastating.
In their excellent book The First Modern Economy, financial historians Jan De Vries and Ad Van der Woude estimate that the Dutch government default wiped out between 1/3 and 1/2 of the country’s wealth.
That, of course, is just one example.
History is full of events that people thought were impossible. And yet they happened.
Looking back, they always seem so obvious.
Duh. The Dutch were spending 68% of their tax revenue just to service the debt. Of course they were going to default.
But at the time, there was always some prevailing social influence… some wisdom from the “experts” that made otherwise rational people believe in ridiculous fantasies.
Today is no different; we have our own experts who peddle ridiculous (and dangerous) fantasies.
Case in point: this week, yet another debt ceiling debacle will unfold in the Land of the Free.
You may recall the major debt ceiling crisis in 2011; the US federal government almost shut down when the debt ceiling was nearly breached.
Then it happened again in 2013, at which point the government actually DID shut down.
Then it happened again in 2015, when Congress and President Obama agreed to temporarily suspend the debt ceiling, which at the time was $18.1 trillion.
That suspension ends this week, at which point a debt ceiling of $20.1 trillion will kick in.
There’s just one problem: the US government is already about to breach that new debt limit.
The national debt in the Land of the Free now stands at just a hair under $20 trillion.
In fact the government has been extremely careful to keep the debt below $20 trillion in anticipation of another debt ceiling fiasco.
One way they’ve done that is by burning through cash.
At the start of this calendar year in January, the federal government’s cash balance was nearly $400 billion.
On the day of Donald Trump’s inauguration, the government’s cash balance was $384 billion.
Today the US government’s cash balance is just $34.0 billion.
(Google has twice as much money, with cash reserves exceeding $75 billion.)
This isn’t about Trump. Or even Obama. Or any other individual.
It’s about the inevitability that goes hand in hand with decades of bad choices that have taken place within the institution of government itself.
Public spending is now so indulgent that the government’s net loss exceeded $1 trillion in fiscal year 2016, according to the Treasury Department’s own numbers.
That’s extraordinary, especially considering that there was no major war, recession, financial crisis, or even substantial infrastructure project.
Basically, business as usual means that the government will lose $1 trillion annually.
Moreover, the national debt increased by 8.2% in fiscal year 2016 ($1.4 trillion), while the US economy expanded by just 1.6%, according to the US Department of Commerce.
Now they have plans to borrow even more money to fund multi-trillion dollar infrastructure projects.
Then there’s the multi-trillion dollar bailouts of the various Social Security and Medicare trust funds.
And none of this takes into consideration the possibility of a recession, trade war, shooting war, or any other contingency.
This isn’t a political problem. It’s an arithmetic problem. And the math just doesn’t add up.
The only question is whether the government outright defaults on its creditors, defaults on promises to its citizens, or defaults on the solemn obligation to maintain a stable currency.
But of course, just like two centuries ago with the Dutch, the mere suggestion that the US government may default is tantamount to blasphemy.
Our modern “experts” tell us that the US government will always pay and that a debt default is impossible.
Well, we’re living in a world where the “impossible” keeps happening.
So it’s hard to imagine anyone will be worse off seeking a modicum of sanity… and safety.
Do you have a Plan B?
