Taking Stock of the World’s Debt
wsj.com
wsj.com
Since Earth doesn't owe money to Mars, it's not at all clear that world-level debt is good or bad.
Every dollar or euro liability for someone is an asset for someone else.
For example, I own US treasury bonds, so for me that's an asset. They pay interest and they're extremely likely to get paid back in full.
For me, debt is good. It allows me to consume less than I produce right now so years later I can consume more than I produce.
Obviously when a family or a company takes on too much debt it can bad for the debtor (interest payments compete with rent and food) and it's bad for the creditor if the debtor can't pay it back.
But at the world level, it's just some of us choosing to consume more than we produce right now, and others of us choosing to consume less than we produce right now.
Isn't it the actual problem though ? When a small portion of people consume a lot less than what they "produce", and another big portion of people borrow from them to consume more than what they produce, isn't it an indicator of rising inequality ? This imbalance can't last forever, and either it provokes a cascade of default and threatens the stability of the economy, or it keeps the big portion of people in an interest rate paying spiral, slowing the growth of the economy. Either way, I don't see it as a good thing at all
Why not? Debt doesn't necessarily resolve itself by default. Most of it is just lifecycle timing differences.
If I'm 40 years old, I'm saving for the future. I consume less than I produce, and I lend the surplus now so I can get it back later plus interest.
> interest rate paying spiral, slowing the growth of the economy
When I was 20 years old and early in my career, I didn't want to wait to pay cash for a house and car. Then I consumed more than I produced, and I'm thankful that debt allowed me to do that.
So more debt actually increases the growth of the economy, since it allows people to buy houses and cars earlier in their lives. Reduce debt and the economy shrinks (which is basically what happens when central bank raises interest rates).
> isn't it an indicator of rising inequality?
At any given moment, some families, companies and governments want to save, and others want to consume. Debt lets us trade time preferences so we all get more of what we want, when we want it.
In my example, I'm lending money to the United States so I can get it back 10 years from now.
That's not causing inequality, it's giving me the freedom to produce now and consume later.
Greece is an extreme example. They borrowed far more than they could ever pay back and wasted it. When borrowing is spent on things that don't pay back a return higher than the cost of the borrowing, and when that's done on a large scale with no other credible source of income to pay back the debt, both the borrower and the lender get burned. The problem is that you don't always know the return you're going to get on the investment, and you don't always know the full cost of the borrowing to fund it because interest rates can go up.
Now days it seems that the risk of uprisings are low, and that when either whole countries or people en mass start to default, the governments simply steps in and shuffle tax money or print more in order to stabilize the economy. I don't think we actually know how far that strategy can work.
Not only did this lead to bands of outlaws roaming the countryside (and eventually posing a risk to the cities), it meant that cities lost a sizable part of their labour force and were unable to function as well.
Hence jubilees to let off steam and forgive all debt, welcoming people back into the cities every 7 years or so.
I'm arguing that you can't determine what the unsustainable level of debt is for the world in total.
Yes, debt can be unsustainable for a family, or a company, or a nation.
But if I, as a creditor, decide to risk my capital by lending to my neighbor, or to the United States, that increases total world debt, but it's not necessarily bad or dangerous.
In the case of Greece's debt crisis, the important question is why creditors lent too much to a nation that couldn't pay it back.
There are many answers from ignorance to failed governance to corruption, but none of the answers have anything to do with the general level of debt in the world as a whole.
A lot of the debt is based on real estate and physical goods. Realistically there exists a very finite amount of land (and a concrete limit with current materials on how high you can build) and raw materials. Without becoming a space-based civilization that can easily strip mine other planets and the asteroids... only so much of this debt can even be generated unless we move to some sort of society where everyone is like "I bet you 5 million dollars that bird drops a load on that car in the next 2 minutes" hey the bird didn't, pay up "hey man, can you just add it to my tab?".
At some point you run out of goods or land to sell, at which point you have debt holders that want their money and debtors that can't buy more because they are now out of work from manufacturing the goods they, or their peers, were buying.
Part of the reason we have such a disparity of wealth is because the owners (and lenders) of the resources and sellable goods are selling those things to the people making them. Instead of buying furniture from the local furniture maker, you buy Ikea. Instead of going to the neighborhood cobbler or sandlar you log on to Zappos or go to Finish Line. Instead of going to your local butcher you go to Kroger or Publix and buy meat that may have come from a massive corporate ranch thousands of miles away and in the case of ground meat might contain bits from a dozen animals.
We've basically become somewhat like a 'company store' society and many people carry debt for just their consumer purchases.
"Hey I want the new ninplaybox 720 so I can play MaddenBall 2099, charge"
"Hey I need a car, hey that one is 1.2x my annual gross, let me get a 6 year loan please"
"Hey I need a place to live, oh look this one is only 4x my annual gross, let me get that 30 year mortgage with 10% down that I'll probably refinance and/or get another mortgage and either spend 50 years paying off or move in 4 years and basically walk away with no equity pocketed".
None of this is sustainable and it certainly isn't scalable for the few billion people currently not living this way. In 2016 China had 289 million registered drivers, in 2017 they had 316.58 million registered drivers... that's 27.58 million new drivers and even if only 10% of them purchased a vehicle do you really think they paid cash or do you think the bulk of them took on debt? So 2-27 million new debtors in a year. Not sustainable.
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>If I'm 40 years old, I'm saving for the future. I consume less than I produce,
You spend less money than you earn.
If you eat meat and aren't considerably overweight, it takes about 1/2 of an acre to produce the approximately 1996 pounds of food you consume a year.
The average American consumes around 500 gallons of gasoline a year.
The average American's household, work and transportation energy equals about 15,000 pounds of coal a year.
The average American throws away approximately 185 pounds of plastic a year.
The average American throws away about 4 pounds of trash a day.
Without very cheap labor, automation, machinery, relatively cheap fossil fuels, government subsidies, etc become impossible and as all of the things (including resources) involved in enabling our lifestyles they are wholly unsustainable over any long-term time scale.
With debt fueling a large part of this, increasing debt is also unsustainable.
> 2-27 million new debtors in a year. Not sustainable.
Why not? Simply because it's a big number? What number would be sustainable?
Mostly because the people/institutions lending the money presumably have a finite supply and a point at which they won't lend more due to risk. `
Then you have wildcards. What if 10% of people in China end up with a car loan, can the lenders (or their insurance companies) survive if a natural disaster destroys 10k cars/lenders? 100k cars lenders? What if China enters into a war? What if tariffs continue to rise causing less trade with China from the US (clearing international freight is what I do for a living, freight from China has very much declined with section 301 already)? What if China does somethnig that causes trade embargoes/sanctions and their economy takes a significant hit? Can the lenders survive 1 million people unable to service their debt? 10 million? What if China enters a war with someone, say Russia, and has tens or hundreds of thousands of jobs disrupted via a draft/conscription or have to shift a million factory workers to wartime production and pay them even less than they make now and they can't service their loans?
With millions of new drivers a year, oil consumption increases. Oil consumption increase = price increase. This price increase raises the cost of all physical goods as transportation of raw goods and finished materials increases. With prices of manufactured goods increasing, trade can slow. Trade slows, jobs dry up. Jobs dry up, debt is defaulted on.
The more you have outstanding, the less sustainable it is, the more your risk increases, the more risk of absolute ruin increases.
Land is expensive / valuable only in a few locations (e.g. NY, SF, Tokyo ...), and in parts only due to legislation that presents density.
Sure, the Sahara has 3.552 million square miles of available real estate. San Francisco, NYC, Chicago, Los Angeles, Tokyo, Beijing, Paris, London, Canberra, Geneva, Soul, Oslo, Zurich, Hong Kong... not so much.
You also have a very finite amount of land that is arable and unfortunately we keep losing more and more of it to development, desertification, etc.
Again, sure there's a bunch of the U.S. that has extremely low population density but in most cases the land isn't very arable (if at all), there are no water sources for any sizable population, there are no exploitable resources to build industry around (mining, oil and gas, timber) to initially start towns around.
Realistically usable land, desirable land, land that can support populations is very much a constrained resource.
desirable land, land that can
support populations is very much
a constrained resource.
We only loose land to development were we don't push density. Desertification is not a major problem, since -- due to global warming -- we win more new land in previously uninhabitable areas (e.g. Siberia). From a sustainability POV, it is desirable to increase density of human dwelling: the more density, the less transport is needed, the more public transport makes sense, the more heating / cooling, electricity production etc can be centralised, which means more efficient usage of resources.
Just because there is land, does not mean it's usable or should be used.
Functional real estate remains an extremely finite resource. Land prices will continue to rise, debt amassed for purchasing said land will continue to rise and will sooner or later hit a wall where land is largely only exchanging hands when the owner dies for large parts of the world.
Not to mention student debt.
To put it another way, there's always an intrinsic limit to debt that may or may not be concretely captured in practice - we should probably not be letting individuals borrow a billion dollars if they're earning a median wage and have no net assets, for example.
That's the way in which debt can be dangerous, on a societal level - as in 2008, when society as a whole over-leverages itself, there's no easy path back to a safe level of debt.
What's the alternative, equity? Traditionally regarded as more risky?
> when society as a whole over-leverages itself, there's no easy path back to a safe level of debt.
This is a rather climate change like situation, isn't it? It's always advantageous to each individual to have more, and it produces economic growth - but if there is Too Much, then it's a problem to society as a whole.
Some people would call this a tragedy of the commons.
If regulators required banks to finance at least half their lending portfolios by bonds (+equity) instead of deposits or intra-bank loans, the risks for both bonds and deposits would be much more transparant.
Bonds would be seen as risky, but would pay a reasonable interest rate, while deposits would be risk-free and interest-free.
The normal operation of bankruptcy law puts bondholders and depositors on the same footing. If the bank is in a position where it can't pay the bondholders the depositors are also at risk.
> deposits would be risk-free and interest-free
That's pretty much what central bank insurance gets you. But you can't be free of the counterparty risk of the bank ceasing to operate rendering you illiquid while it's resolved.
If more of the risk was carried by (lower priority) bonds, the central bank/government would not have to carry risks associated with a credit market crash. Central banks could still be lenders of last resort if there is a liquidity crunch, but only as long as the bank is well within its capital requirements.
The main problem I see with the current system, is that it is so opaque to most people. Even if the system is not inherently corrupt using "fractional reserve banking", most people are not likely to be able to tell whether or not it is. If moving the risk to bonds (or all the way to bank stocks), it could hopefully shut down some conspiracy theories and also make it more difficult to resist various forms of moral hazard for regulators and bankers, as bond-holders would be more vigilant than most depositors.
Also, both of the criticisms of traditional currencies (ie "debt backed" and "fiat") are flawed, I think. For a stores of value, for some to be "debt backed" is probably a necessity. To "save" means to postpone consumption.
The efficient way of doing that, is to let someone consume more than they produce today, so that you can consume more than you produce tomorrow.
The main other alternative is to invest in assets with actual value (stocks, real estate, etc). But there is a limit to how much value can be stored in this way without creating dangerous bubbles and extreme volatility.
Also, for a currency to be "backed by government fiat" is also an advantage. While the government may ban bitcoins tomorrow (as many already have), with traditional currencies, you have some degree of certainty that it will be legal tender for at least the medium term future, and you can also expect some degree of predictability for what the value will be. Both are critical for a currency to be used as a unit of account and means of exchange (particularly for time-shifted or recurring payments).
1) Generally it is difficult to make sure that anything maintains its purchasing power. Physical objects and materials will likely have some value in the future based in its utility (even if that value is very unpredictable).
Immaterial items, such as traditional currencies or Bitcoin have no intrinsic value. All the value is the one attributed to it via social conventions. Bitcoin has the added disadvantage that it is not backed by a government, which means that the value can suddenly go away, and more easily than currencies.
2) Savings in Bitcoin yield no interest rate. In fact, unless you do all the work yourself, you have to pay for the storage. (And currently, even a risk of theft.)
Of course, you may hope that the price goes up, but that is pure speculation, and it is also a zero-sum game at best, and a ponzi scheme at worst.
3) Some amount of lending is actually good for the economy as well as for individuals. Young people and people who want to start a business can have a net benefit from some lending/borrowing, even if they pay some interest. Combined with the previous point, this makes debt backed money a potential win/win solution.
In sum, storing value through lending, if implemented correctly, reduces volatility and provides additional utility to both the lender and the borrower.
Of course there are other good ways to postpone consumption, most importantly stocks and real estate. These are more volatile in the short term, but have some advantages in the long term, particularly if the demand for loans is low.
But for your example, putting all your money into a single house can be more risky than you think. In 1968, Detroit was precisely a popular growing city. If you'd bought a house there then, all the value (+ taxes) would be lost now. It is really hard to predict what locations will be popular 30 years from now, and for the house itself, it will trigger property tax (in most places), it will maintenance, and 30 years from now it could be obsoleted by new construction methods, materials, etc.
Personally, I split my saving about equally between my mortgage, the global stock index fund, while the pension savings from my employer goes mostly into bonds.
I think Bitcoin actually does do this in a very subversive way - but it does not to the letter produce a yield. I think it is similar to the way a stock buy back works in having dividends "distributed" to shareholders. Nothing takes place from a taxable event standpoint, but the reduced supply increases the price for the same demand.
Bitcoin similarly (and historically) produces a yield that has outperformed savings accounts on average. This may not be true into the future, but I expect that it will be so long as at least the same amount of real world trade occurs using it as a currency.
But this is one of the biggest reasons we would not want to use it as a measure of value or standard for deferred payment. Who wants to commit to future payments in a deflationary currency?
Salaries in a deflationary currency leads to unemployment (or one has to allow employers to unilaterally decrease wages at will).
Pensions and other government payments in a deflationary currency leads to bankrupt governments.
Also, consumption (and thereby the economy as a whole) will tank as delayed consumption will be a guaranteed win.
Finally, the super rich will be able to profit maximally if bitcoin replaces national currencies, as a deflationary currency inherently favors the already rich.
Pensions and government payments would not start with commitments in a deflationary currency, and as a result, any commitments made there would be done with full appreciation of the realities of a deflationary money standard. This just means tighter credit and better fiduciary responsibility.
Consumption decreasing is a misnomer, as people are still required to live. Delayed gratification is generally a win, as it is today, and the economy doesn't tank. If it is saved or invested, it works out the same. Saved you reduce supply which benefits all other savers, who are technically getting a paper rate of return. If they can invest this with expectation of a greater rate of return (by creating value faster than that of saving) then they should do this. With enough saved funds, the risk tolerance increases. There is nno reason that doing this with money you don't have makes the scenario any better.
And the super-rich will benefit from being rich. This is not news. What is news is that they won't also benefit from seigniorage and the Lindy effect. I'd call that a win.
If it does, then Bitcoin would remain an optional part of the economy. As long as Bitcoins are not required in order to make transactions, and as long as deferred payments are not made in Bitcoin, it lacks protection against sudden surges in volatility (that may ultimately take the prize to absolute 0).
But let's assume for the sake of argument that somehow Bitcoins can reach a steady state of increasing in purchasing power by 2% per year or more.
The first thing that would happen, would be that government bonds would have to do the same, or none would buy them. This would have an immediate effect on the US economy, since the US is not likely to be able to pay such a high real interest rate while maintaining the current deficit.
Since you tend to argue in favor of the interests of savers, I suppose you are willing to force the government to cut expenses or increase taxes to make up for the difference, and let's assume that BC are not made illegal for this reason. (It would probably trigger a 1929 style depression, but that could pass.)
Next is the problem of decreased consumption. While I agree that decreasing consumption is a virtue for most individuals, the problem when aggregate demand goes away, is that fewer people are required to work to create the goods that people consume. As people earn less money from salaries, this further reduces the ability to consume (demand) and drives deflation even further. This leads to a downward spiral that can ultimately end in famine. People can only be "required" to live if they actually can buy food. Also, this will come on top of the reduced public spending described in the previous paragraph.
Even middle class people with some savings may be affected by this, by being unable to find work. Even if the savings increase in value somewhat, most people only have enough for a limited time without income.
Taxes will plummet due to reduced employment, and the government, now without the ability to run at a deficit, will not be able to pay for welfare programs. Food stamps may not be available.
Meanwhile, the purchasing power of the super rich will be safe, as well as possibly the small group of people that is needed to produce the goods that the super rich consume.
Until the revolution comes.
All caused by having an asset type with a guaranteed profit attached available.
Creditors are intelligent and they have free will. They generally try not to lend to people who can't service the debt.
It seems like a pretty good system to let creditors decide who to lend to and then allow them to go bankrupt when they make bad decisions.
I don't think it is that simple. 1) If the world is overleveraged you wind up in a situation where the insolvency of one debtor dominoes over to the lender, who is then unable to pay the next debtor, etc. In one sense some leverage means we are interconnected, which is good because we are likely to pay attention to each other, but if it gets too much, that the effects of bad events can spread.
2) By the nature of compounding interest, having a system that depends on leverage (as ours does now) puts a societal requirement on growth that is enforced through fiscally punitive reinforcement... So that is a fundamental reason why there is a lot of consumption, environmental destruction, and energy demand, even when we try to be active towards conservation -- our current economic structure (and i'm not talking about 'capitalism') simply is not compatible with those goals writ large.
3) when a individual cannot pay their debt, it is because they consensually took on that debt. When a sovereign nation cannot pay its debt, often times the effects are generational, and very much nonconsenual. The current generation cannot go back in time and vote against the profligate spending of the previous generation. One wonders if this is ethically tenable, yet every government does it. Moreover, when a government overspends, the ill effects of that overspending typically hurt the poorest the hardest.
I do think this might be one of the big questions of the 21st century. Stable society requires long-term commitments (debt, investment), but people demand the ability to swing policy back and forth on 4 or 5 year timescales.
> Moreover, when a government overspends, the ill effects of that overspending typically hurt the poorest the hardest.
This is usually inflicted on them by the lender of last resort, the IMF.
> This is usually inflicted on them by the lender of last resort, the IMF.
Is what way? I’ve never heard of the IMF demanding this. The method of “austerity” or reducing a deficit could very well include taxes on the rich. It is a local choice to hurt the poor instead (and then blame the IMF).
Not to be rude, but that can only mean you've not been paying attention.
Stiglitz wrote an entire book on the subject, "Globalization and its discontents": https://www.theguardian.com/business/2002/jul/06/globalisati...
The IMF were notorious for providing the same advice to different countries with only the name changed (and in one anecdote of his, forgetting to do the search and replace).
They are still at it: https://www.taxjustice.net/2018/07/06/the-damage-of-internat...
Currently going on in Jordan: https://www.alaraby.co.uk/english/news/2018/6/3/thousands-pr...
> reducing a deficit could very well include taxes on the rich. It is a local choice to hurt the poor instead
No, the IMF demands specific changes as part of the loan conditionality.
Edit: your argument is
- IMF requires laws XYZ as part of loan agreement
- country implements XYZ exactly as required
- this is the fault of the country not the IMF?
Please cite examples of countries successfully "wheedling out of" or defaulting on the IMF.
> and in one anecdote of his, forgetting to do the search and replace
I would be very interested in that (but could not find it myself).
"Critics accuse the institution of taking a cookie-cutter approach to economics, and they're right. Country teams have been known to compose draft reports before visiting. I heard stories of one unfortunate incident when team members copied large parts of the text for one country's report and transferred them wholesale to another. They might have gotten away with it, except the "search and replace" function on the word processor didn't work properly, leaving the original country's name in a few places. Oops."
Poor people have all their assets inside their country.
This is why poor people are more affected.
As an example, think of a person who owns a building in another country. Kinda hard to tax. Especially if you don’t know it exists.
Not during the past decade, because the IMF policy changed a lot during the early 2000s. But that was basically the recommendation of the IMF to the financial crisis in the 90s.
See how it handled the Asian crisis: https://en.wikipedia.org/wiki/1997_Asian_financial_crisis#IM...
I'm going to assume US government works something like how it does in Australia and make a guess. The vast majority of policy is going to be set with bipartisan support, and nobody talks about it because "yeah, we all agree on good policy" is never going to win votes in an election. Only points of difference matter.
The issues that are hyped up for elections are important, but typically minor variations on a theme from the perspective of a civilisation. The movements looking to seriously challenge the mechanics of our debt and investment systems (I recall a few,from a couple of different quarters after '07 and '08) seem to have failed in having a lasting impact.
Then why the 2008 financial crisis happened? It was because of bad lending which resulted to defaults.
Thing is, since taking debt is inherently taking risks, if you look at it from a sociopolitical view, the effects of managing this risk badly can be disastrous for a society. For example, if incompetent governments take on debt that they cannot pay back, future generations will suffer, like it happens to Greece right now.
And if a country owes money to its richest inhabitants then it means that effectively, the poor owe the rich.
This is not at strange as it seems. In fact, throughout most of history, a negative interest rates on savings were the norm, simply because what was saved was usually grain or rice. People still saved in this manner. Even if 50% had been eaten by rats, having at least some extra food in the famine year would be worth it.
You can say that debt is a liability for one party and an asset for the counterparty. But debt or bonds are also control. One party has control over the other. And more importantly, the more debt there is, the more power the people who control debt and who control interest rates have on governments, nations and the world.
If you look at debt through a narrow window, then it's just a simple ledger entry. If you realize what debt is and see it in relation with power and influence, things aren't so simple.
That sovereign debt has this property is truly underappreciated in our society and I think one of the great tragedies of the 20th century. We see ostensibly liberal economists calling for increased sovereign spending and sovereign debt without understanding that the debt treadmill enslaves the poorest the in the heaviest shackles.
Generally the mathematical resolution for sovereign debt is inflation and the blind retort that I hear all the time is that the poor are in debt and inflation helps those in debt which I don't know where it comes from but is woefully ignorant of the thue state of things (the poor are usually not in debt having less access to finance and when they do they are in short term high interest debt - and many financial instruments, that the wealthy use to increase their wealth like options and leveraged trading, require availability of lending to exist).
I hear this frequently stated as fact but I've seen no evidence for it, and it doesn't make intuitive sense to me.
Sovereign debt is serviced either through taxation or through inflation.
It's the rich who pay a majority of the taxes, and rich creditors also suffer the most from inflation. So how, exactly, are the poor on the hook for national debt?
> Most of the rich are net debtors.
1) Have you ever traded options? You are borrowing. Have you ever taken out an inverse ETF? You are borrowing. Have you ever traded Forex? You are borrowing. Have you never participated directly or indirectly in those instruments? You are not rich.
2) Just do the math. If you're poor, and spending 90% of your day to day on inflation sensitive expenses, and there is x% inflation (let's plug in x=10, because it's easy, but it applies at all percentages, an exercise to the reader) then your margin of living will be impacted by 90%.
Note if you were spending 95% of your day to day on inflation sensitive expenses, you would be underwater after 10% inflation.
By contrast, if you were spending 20% of your day to day on inflation sensitive expenses, your margin of survival would only decrease by ~3%.
The typical retort that I am going to anticipate is that wages keep track with inflation. They don't and, that's by design. I will quote the great liberal economist here:
https://krugman.blogs.nytimes.com/2010/02/13/the-case-for-hi...
> Yet when you have very low inflation, getting relative wages right would require that a significant number of workers take wage cuts. So having a somewhat higher inflation rate would lead to lower unemployment, not just temporarily, but on a sustained basis.
Just to be clear that we understand the policy here in blunt terms: The point of inflation is to cheat the working classes out of their income so that the ruling class can lay claim to high employment metrics.
Your analysis is missing a pretty critical half: Those in support of leaning more on borrow-and-spend are generally advocating for the increased spending skewed towards the poor and for the taxes that pay for debt service/paydown skewed towards the rich. I don't see how this vision, fully-realized, would "enslave the poorest in the heaviest shackles".
I live in the bay area. Even here, companies jockey for federal funding like NIH grants and SBIRs. There's a lot of money in those. I promise you very few if anyone in deep poverty in the city of san francisco (tenderloin, parts of soma) are being awarded these grants. In Europe, where there are social democracies, I promise you an upper middle-class person connected to the technocrats in Brussels is going to be a greater beneficiary of largesse than a muslim from a banlieue in Paris.
Individuals produce less taxes than governments spend and consume more than a paycheck. This gap is what got Greece into trouble but it certainly felt like "the good life" while it lasted.
> But at the world level, it's just some of us choosing to consume more than we produce right now, and others of us choosing to consume less than we produce right now.
Every generation since the 1950s has consumed unsustainably high returns on their taxes (by government expenditure and with maturing bonds paid by bonds issued). It's fraudulent when extraordinary returns to earlier generations are funded not by growth but sustained by new generations seeking the same returns.
The real sustainability issues need to be measured in something other than money.
More debt, means less ability to modify your expenses quickly, which means less ability to respond to changes in your income. This is, in aggregate, a very bad thing.
Thats what this is about, not some personal finance blog’s conment section where you broke away from the herd to say “hey debt can be good”
1. Debt needs to be taken in context with both income and wealth e.g. italy's $2.8T [1]in debt seems large as a ratio of GDP, but considering the country's NET wealth is $10.5T [2] meaning the country is in fact quite rich
2. Who owns the debt matters as well, for example if Icelandic government debt is held only by Icelanders the difference between defaulting and raising taxes is purely an accounting exercise at the macro level
[1]https://www.nationaldebtclocks.org/debtclock/italy [2]https://www.nationaldebtclocks.org/debtclock/italy
It becomes not so much an issue of never having to pay the debt back because we owe ourselves and can ultimately write it off, but an issue of, at a certain level of easy credit, is it possible that it becomes impossible to keep making good investments. There’s definitely a balancing act in how much world debt is too much.
That being said, a high level of debt can still be notable. The cost of this liquidity transfer is risk, and the usual way entities holding a lot of debt handle this is by spreading the risk across the debt they hold. This obviously doesn't work perfectly if the debt is correlated, and as the proportion of debt goes up (relative to other assets, economic growth, etc), this risk also goes up.
[1] - http://neweconomicperspectives.org/2014/01/diagrams-dollars-...
Sounds like when cigarette companies funded studies to 'prove' cigarettes were safe.
They even went full 'USA Freedom Act' by throwing the word Modern in the title.
Those are two non-political red flags. I'll save my personal ideas on economics as this gets into politics.
And generally people do have a misconception that printing more money = inflation. For example in the last 2 decades the amount of Chinese currency has increased by more than 800%(https://webofdebt.files.wordpress.com/2018/12/m2-for-China-F...), but inflation remains at 2.2%.
Modern Monetary Theory itself is a general economic theory, rather than an American monetary or fiscal policy position. The jury is still out on it, but it could suit countries like the US or maybe Switzerland, who have the right economic and currency conditions.
What you can't do is print foreign currency. So the component of spending that goes on imports is affected. You can't have a program that prints money to buy people discount fuel if you're not a net oil producing country, for example (this mistake has blown up a number of African economies!)
> government debt is consumer surplus
You are referring to the Sectoral Balances Framework, which says that in aggregate, one sector's deficit is another sector's surplus.
https://en.wikipedia.org/wiki/Sectoral_balances
The MMT response to "the world's debt is soaring" is that means "the world's assets are soaring" as well. Because every liability is someone else's asset. The question is, what kinds of assets are these? If we are talking about debt of governments with sovereign control of their currencies, this is a stable situation. But other kinds of debt could lead to a bubble popping and a financial crisis.
The next problem is, even if it's true, it may not matter. If the political pressure is too high, governments will proceed from doing what MMT says, and move on to doing what Venezuela did. This may not be a safe road to start down even if the theory is correct, because human nature says that we won't stick to the course specified by the theory.
I could be convinced that I'm wrong, but I want more than a fine-sounding theory that says we can have our cake and eat it too. I want a theory that says how this is actually different from all the times it's blown up in the past.
There's a huge difference between "I owe £10k tomorrow" and "I owe £10k over the next 20 years with 1% interest."
When you start thinking in terms of liquidity it makes a real difference to how you think about money.
World Debt is $250T
World GDP is $80T https://www.visualcapitalist.com/80-trillion-world-economy-o...
Central bank interest rates are around 1 or 2% for the west ( https://au.investing.com/central-banks/ ), a lot higher for others
So at the moment servicing that debt is doable - for the west anyway. If interest rates go up then things might get tricky.
However the debt seems to keep going up, so if the debt keeps increasing and the interest rates go up then things will turn nasty. There are no doubt some countries now that are effectively dead man walking and if interest rates go up could start crashing which could collapse the whole house of cards. I suppose rampant inflation will remove the debt.
Total wealth of the world is $317T (https://en.wikipedia.org/wiki/List_of_countries_by_total_wea...) so everyone could liquidate and have some money left over.
So as long as the assets of the world make enough to service the interest on the debt things will keep chugging along. The real problem I suppose is how much of the world has to work to service the interest bill.
Or is that ridiculously naive?
I worry that this is the case. Our best economic leaders have been wrong(or told to do wrong policies for political reasons for ~200 years).
Tasty candy today can spell a stomach ache later. Given the numerous times our grandparents generation has pushed off problems, I wonder if government debt is a short term political win, with long term ramifications(looking at Japan).
As long as real interest rates remain negative, it is clearly self-sustained.
Countries that control their own currencies can always negate all debt by printing money (through fractional easing).
However, if inflation starts to increase again, printing money is only a short term solution if there is a budget deficit. If the budget is run at a deficit in a high inflation scenario, printing more money will cause Venezuela style hyperinflation.
In the case of the US, it would be interesting to see how the government would react if the dollar was put under this kind of pressure. Early austerity would result in mass unemployment and heavily slashed welfare. Looser policies would create high inflation, cutting savings by half or more and also collapsing salaries for public sector employees.
Hopefully, the US would be able to avoid hyperinflation, but with the current tendency towards populsm (on both the left and the righ), I don't feel so sure anymore.
Normally the commodities which cause this problem because they have to be imported no matter what the price are the global staples: oil, food, pharmaceuticals.
So you'd have to ask exactly how the US could get into this state. It exports all three of those staples. It's a major inward investment destination. It's the owner of the dollar, widely recognised everywhere else as "hard currency". It would take extraordinary mismanagement to lose those advantages.
Venezuela's dire situation is mostly because its oil industry has been chronically mismanaged and production has collapsed. One consequence of this is that oil is being imported (bought at global prices in dollars) and sold at local pre-collapse subsidised prices (in worthless Bolivars).
Similarly Zimbabwe's collapse was mismanaged "land reform" expropriation of profitable agriculture, and Weimar Germany was ruined by the need to export gold to France for reparations.
But imagine the following scenario: 1. Some left- or right- wing populist (worse than Trump) is president, and is backed by congress. 2. A 1929 size crack hits the market. 3. The deficit is increased to 2B/y, following the doctrines of most populists due to stimulus policies combined with reduced tax incomes. 4. The market for US treasuries collapse, making them almost unsellable. 5. Fed buys all treasuries, both the ones needed to cover the deficit and to roll over existing debt as well as rotten private sector debt. 6. Inflation follows the money supply increase, and then some. 7. Massive strikes/protests hit the country as purchasing power for imported goods and goods created from imported materials. (Think French yellow shirts x3) 8. The government caves in, and increases wages by decree to match the inflation.
(Repeat steps 5-8 ad infinitum)
What would the inflation be after 5-10 years of such policies? Probably less than 1000%, but quite possibly more than 20%
5 essentially already happened with QE
7 Americans don't really do this on any scale
And finally.... 20% inflation is hardly a nightmare. The US hit 14% in '79. The only thing that can take it back there is an external oil shock.
Edit: Just to clarify. Other currencies exist, some may be seen as safer than dollars if a populist government is wrecking the economy there. Also, there is always stocks, real estate, precious metals and possibly crypto.
5 : Yes. So next time the expectation will be that it is ok to do this. Which it is, until the time that confidence is lost.
7 : Watching from the outside, America seems to be radicalizing, as is the rest of the West. New generations no longer seem to understand the risks of fascism or socialism.
And finally, I agree, 20% is not necessarily a nightmare. But keep in mind that the US had general growth exceeding the inflation in 79. UK, for instance, had stagflation, which is quite a bit more demanding. In order to reign in the inflation, fiscal tightening is a necessity, or the inflation may become permanent.
Er, ’79 was widely regarded as a nightmare, and inflation was a huge part of the reason. ’79 was the center of the “night” implicitly referenced by Reagan's “Morning in America” reelection image that contrasted the time after his election to the time immediately preceding.
> The only thing that can take it back there is an external oil shock.
An economic shock, but no reason it would have to be an external oil shock (in fact, the US is more resistant to that particular kind of shock than it was in the 70s.)
5-10 years of a combination of #1 would have results that would make inflation the least of most people's concerns. (Also, somewhat implausible; even Trump has had problems with a same party Congress while he had it.)
> The deficit is increased to 2B/y, following the doctrines of most populists due to stimulus policies combined with reduced tax incomes.
The budget deficit for FY 2018 was $779B, or over $2B/day. It can't “increase to $2B/year”, that would be a ~99.75% reduction, not an increase.
> 5. Fed buys all treasuries, both the ones needed to cover the deficit and to roll over existing debt as well as rotten private sector debt.
So, populists supporting the radically insane President have taken over the Fed (enough to direct the FOMC consistently, even though that body consists of a mix of the Board of Governors—wih staggered 14-year terms) and a rotating subset of the Reserve Bank Presidents (who are elected by each Reserve Bank’s directors, who largely come from the banking industry?) as well as Congress?
This scenario is increasingly implausible.
> 8. The government caves in, and increases wages by decree to match the inflation.
What now? It can increase minimum wages by legislation, sure, but if it does so to match runaway price inflation not driven by output gains, it just kills employment, which breaks the cycle because no one is going to demand wage increases when they don't have a job.
It can directly employ people at whatever wages it chooses, of course, or try to force employers to retain employees while paying higher wages, but those each have their own plausibility problems.
> (Repeat steps 5-8 ad infinitum)
Yeah, that's not going to happen as infinitum. If you get through 8 once (which you won't), government collapse and/or civil war are imminent.
Thanks for pointing this out. It should be 2T of course, in US units.
> So, populists supporting the radically insane President have taken over the Fed (enough to direct the FOMC consistently, even though that body consists of a mix of the Board of Governors—wih staggered 14-year terms) and a rotating subset of the Reserve Bank Presidents (who are elected by each Reserve Bank’s directors, who largely come from the banking industry?) as well as Congress?
> This scenario is increasingly implausible.
QE was used after 2008, and there is a perception that this is not a problem. Hopefully you are right, and the Fed would be able to resist demands to continue QE into hyperinflation.
> What now? It can increase minimum wages by legislation, sure, but if it does so to match runaway price inflation not driven by output gains, it just kills employment, which breaks the cycle because no one is going to demand wage increases when they don't have a job.
You are right, it does kill employment. Still, it was just done (to some extent) in France (technically not due to inflation, but due to increased costs of living).
> It can directly employ people at whatever wages it chooses, of course, or try to force employers to retain employees while paying higher wages, but those each have their own plausibility problems.
Populist governments all over the world have been using both approaches for a long time.
Anyway, the above is a perfect storm scenario. It is not happening tomorrow, but requires 3 trends to continue, probably for 10 years or so:
A: A continued move towards more populist leaders in both parties.
B: A continuously increasing pubic deficit
C: A major worldwide economic crisis as a trigger.
Edit: C is not a trend, only a trigger.
And even then, responsible institutions may be able to step in and limit the impact to a 1929-like event. But if not, the US may head down the same path as Argentina or Brasil.
Or what happens when something like the Tunguska event happens over NYC or London or Tokyo and you suddenly have 500 billion or a trillion in damage including mass casualties and likely hundreds of thousands of dead.
Then what? You just lost a tremendous amount of value and the ability to generate a very large amount of income and probably just completely lost some companies and private individuals that owned debt.
Or if not an asteroid/comet/meteor, what if it's a hurricane barreling right into NYC or 'the big one' hitting one or major cities in California or an Asian city on the ring of fire?
>everyone could liquidate and have some money left over.
Problem with that though is real estate. Real estate in NYC alone is worth something like 1.5 trillion dollars. I imagine at least 10% of that total wealth of the world is just in the real estate in a dozen or two cities. And what happens when global warming leads to flooding of the land of many coastal cities, in fact 14 of the world's 17 largest cities are located along coasts so in 10, 50, 100 years when some of those cities have either had to expend huge amounts of money finding a geoengineering solution, or have been abandoned and are now flooded, what happens with the debt that still exists? Are companies, are people, going to keep servicing loans on property underwater? Are they going to be able to move their manufacturing without taking on large loans at potentially unreasonable rates?
Debt often lasts several decades and we now live in a world where drastic events can happen in days or weeks. 1 nuclear weapon can effectively destroy a city (even if it doesn't outright level the city, the economic implications of even a small nuclear detonation would be catastrophic for the host country at a minimum), single storms can severely impact the lives of millions, a single volcano can displace millions of people for days or weeks like when Eyjafjallajökull erupted in Iceland in 2010 and resulted in a 6 day travel ban that canceled 95,000 flights.
The more debt the world creates, the higher the risk of failure increases by nature but it increases even quicker in the 21st century when there are extreme buying fads and trends, destabilizing climate, weapons of mass destruction.
Corporate debt level has risen sharply due to low interest rate. Corporate bond coming due will be re-financed at higher rate now. Bad for earning.
Government debt level rising is just new money creation to fuel the economies.
If ever. A lot of high-quality corp debt was issued around (a) record low interest rates, (b) high tax penalties for repatriating foreign earnings into the US.
Neither of those are a factor anymore.
If you make more money, it has zero productive impact directly. What it does is designate wealth claims to whoever gets the money at the expense of whoever doesn't get the new money.
So, if the government gives every citizen a billion dollar check, besides causing inflation, that drastically dilutes the relative purchasing power of Jeff Bezos. It's not that different from the government simply taxing out of existence a good portion of the money held by the wealthy. Either way, it's redistribution. And it's a powerful and important tool for carrying out political agendas which themselves may be good or bad based on your political values.