The world has arrived at this brink of economic failure by believing there is such a thing as a free lunch.
Never mind climate change. There’s a much greater threat on the horizon: the existential threat of a runaway worldwide debt load spiralling into a ruinous default.
Once upon a time wishes were deferred until the funds had been accumulated to pay for them. But no longer.
Couple today’s culture of instant gratification – “When do we want it? Now!” – with the demands, especially prevalent in Western society, that more and more services should be provided by the state, whilst no one wants to pay more taxes, and the cause of the burgeoning debt load is obvious.
But how bad is it?
The IMF reports worldwide government debt has tripled to US$91 trillion since the 1970s, and private debt has similarly increased to US$144 trillion over the same period (1).
Added together, current debt stands at 235 per cent of world GDP (1).
But 235 per cent of GDP is just a number, right?
Wrong. To put it in perspective, that debt is comparable to you spending your overdraft so fast that you now owe the bank nearly two-and-a-half times your annual salary. And how are you going to repay that without drastic cuts to your standard of living?
But, since the 1970s worldwide population has doubled, from four to eight billion (2) and we should expect borrowing levels to rise in line with that, at least. So triple the debt on double to population isn’t so bad after all, right?
Wrong again. In the developed world, where the great majority of this increased debt has accumulated, population has increased by 1.3 billion at most. Eighty per cent more people, but 300 per cent more debt (3).
The rate of ‘First World’ debt accumulation is four times greater than the growth in the number of people available to repay it.
But the cash must be there in the first place, or it couldn’t have been borrowed: so we’re just shifting money from one pocket to another, right?
Wrong yet again. The cash was not there until the world’s governments implemented attempts to restart economies through ‘quantitative easing’. This flooded the world with cash without the necessary output of goods and services to back it up, hence raging inflation levels.
In effect, governments have simply been printing money and lending it to each other. A house of cards that is ever-nearer to collapse.
But NZ’s gross debt levels, government and private combined, are only at 180 per cent of GDP (4), so we’ll be OK, right?
For a little while maybe. But even discounting the fact that debt default among our trading partners will seriously impact NZ, our own debt levels are still too high.
Unlike in Japan, for instance, where the Japanese public hold most of the government’s debt, NZ borrows from overseas, paying high interest rates to external creditors and draining away revenue that should be spent on health, education etc.
For the past few years, despite having a Third World economy, we’ve been borrowing to fund a First World lifestyle. And it will only get worse as we continue to heed the siren song of populist rhetoric.
Rhetoric from the economically illiterate Green Party: that taxes are good, but industry, mining and agriculture, where the wealth to service taxation is generated, is bad.
Rhetoric from the TPM, promoting the idea that a racially divided nation can fund two of everything: services that we currently struggle to fund in the singular, from health and education to parliament and the legal system.
Rhetoric from the Greens, TPM and Labour together, asserting that socialism is the answer and the state can and should fund everything by simply taxing, borrowing and printing the money to do so.
All in all, we are heading into a perfect global storm. First expect one or two small countries to default on their debt. “According to Kristalina Georgieva, managing director of the IMF, ‘about 15 per cent of low-income countries are already in debt distress and an additional 45 per cent are at high risk of debt distress’”. (5)
Then someone a bit bigger falls over. Argentina perhaps, which is on the brink right now unless Milei can pull it back. Or Ukraine, crippled by the war. Or Egypt, where an unsustainable 44 per cent of tax revenue is spent on servicing debt (6). Together with the several other countries in this bracket, any or all of them could default at any time.
Finally one of the big ones goes (7). Italy, with a net government debt level more than twice the official 60 per cent EU limit. Or Spain, which isn’t far behind. Or Greece, at 165 per cent. Or even France, with a current debt level worse than that of Spain and a new socialist Government bent on spending more.
And then there’s China, potentially the biggest risk of all as the real estate bubble that has funded the country’s growth for the past 10 years is due to burst, resulting in US$ trillions of underfunded loan defaults (8).
Once the dominoes start to fall the chain reaction causes a world financial system collapse. Credit freezes, trade goes into freefall and the GFC of 2008 looks like a storm in a teacup by comparison.
But if it does happen we can fix things, just like we did after 2008, right?
Wrong for the final time. Fixing things again will be well-nigh impossible because worldwide government borrowing, the engine that pulled the world back from the brink in 2008 when debt stood at only 36 per cent of GDP (9) now tops 92 per cent of GDP and rising.
The world’s governments cannot borrow their way out of the coming crisis. The money has already been borrowed and spent. It is no longer there.
We could, of course, print more, lending it among ourselves to stave off the inevitable for another year or two, but the end result will still be the same, with raging inflation and an even bigger debt bubble eventually bursting.
The world has arrived at this brink of economic failure by believing there is such a thing as a free lunch: that we can have it all and live beyond our means through the financial machinations of government and private borrowing.
However, as Charles Dickens’ Mr Micawber said, “Annual income, 20 pounds. Annual expenditure, 19 pounds; result? Happiness. Annual income, 20 pounds. Annual expenditure, 21 pounds; result? Misery.”
We should worry a lot less about climate change destroying civilisation. The debt crisis will end it much sooner unless we stop believing we are all entitled to something for nothing.
Is it too late? Unless you believe that human nature can change, it probably is.
References:
1. IMF Global Debt Monitor 2023. September 2023.
2. www.worldometers.info 2024.
3. www.ourworldindata.org 2024.
4. NZ Govt debt 41.7 per cent GDP. Private debt 138.3 per cent GDP. Total 180 per cent. www.ceicdata.com 2024.
5. “The Path to Growth.” IMF report, April 2023.
6. www.reuters.com 2024.
7. www.statista.com 2024
8. NY Times 30/01/2024
9. IMF Report. WP/19/83. March 2019.
Couple today’s culture of instant gratification – “When do we want it? Now!” – with the demands, especially prevalent in Western society, that more and more services should be provided by the state, whilst no one wants to pay more taxes, and the cause of the burgeoning debt load is obvious.
But how bad is it?
The IMF reports worldwide government debt has tripled to US$91 trillion since the 1970s, and private debt has similarly increased to US$144 trillion over the same period (1).
Added together, current debt stands at 235 per cent of world GDP (1).
But 235 per cent of GDP is just a number, right?
Wrong. To put it in perspective, that debt is comparable to you spending your overdraft so fast that you now owe the bank nearly two-and-a-half times your annual salary. And how are you going to repay that without drastic cuts to your standard of living?
But, since the 1970s worldwide population has doubled, from four to eight billion (2) and we should expect borrowing levels to rise in line with that, at least. So triple the debt on double to population isn’t so bad after all, right?
Wrong again. In the developed world, where the great majority of this increased debt has accumulated, population has increased by 1.3 billion at most. Eighty per cent more people, but 300 per cent more debt (3).
The rate of ‘First World’ debt accumulation is four times greater than the growth in the number of people available to repay it.
But the cash must be there in the first place, or it couldn’t have been borrowed: so we’re just shifting money from one pocket to another, right?
Wrong yet again. The cash was not there until the world’s governments implemented attempts to restart economies through ‘quantitative easing’. This flooded the world with cash without the necessary output of goods and services to back it up, hence raging inflation levels.
In effect, governments have simply been printing money and lending it to each other. A house of cards that is ever-nearer to collapse.
But NZ’s gross debt levels, government and private combined, are only at 180 per cent of GDP (4), so we’ll be OK, right?
For a little while maybe. But even discounting the fact that debt default among our trading partners will seriously impact NZ, our own debt levels are still too high.
Unlike in Japan, for instance, where the Japanese public hold most of the government’s debt, NZ borrows from overseas, paying high interest rates to external creditors and draining away revenue that should be spent on health, education etc.
For the past few years, despite having a Third World economy, we’ve been borrowing to fund a First World lifestyle. And it will only get worse as we continue to heed the siren song of populist rhetoric.
Rhetoric from the economically illiterate Green Party: that taxes are good, but industry, mining and agriculture, where the wealth to service taxation is generated, is bad.
Rhetoric from the TPM, promoting the idea that a racially divided nation can fund two of everything: services that we currently struggle to fund in the singular, from health and education to parliament and the legal system.
Rhetoric from the Greens, TPM and Labour together, asserting that socialism is the answer and the state can and should fund everything by simply taxing, borrowing and printing the money to do so.
All in all, we are heading into a perfect global storm. First expect one or two small countries to default on their debt. “According to Kristalina Georgieva, managing director of the IMF, ‘about 15 per cent of low-income countries are already in debt distress and an additional 45 per cent are at high risk of debt distress’”. (5)
Then someone a bit bigger falls over. Argentina perhaps, which is on the brink right now unless Milei can pull it back. Or Ukraine, crippled by the war. Or Egypt, where an unsustainable 44 per cent of tax revenue is spent on servicing debt (6). Together with the several other countries in this bracket, any or all of them could default at any time.
Finally one of the big ones goes (7). Italy, with a net government debt level more than twice the official 60 per cent EU limit. Or Spain, which isn’t far behind. Or Greece, at 165 per cent. Or even France, with a current debt level worse than that of Spain and a new socialist Government bent on spending more.
And then there’s China, potentially the biggest risk of all as the real estate bubble that has funded the country’s growth for the past 10 years is due to burst, resulting in US$ trillions of underfunded loan defaults (8).
Once the dominoes start to fall the chain reaction causes a world financial system collapse. Credit freezes, trade goes into freefall and the GFC of 2008 looks like a storm in a teacup by comparison.
But if it does happen we can fix things, just like we did after 2008, right?
Wrong for the final time. Fixing things again will be well-nigh impossible because worldwide government borrowing, the engine that pulled the world back from the brink in 2008 when debt stood at only 36 per cent of GDP (9) now tops 92 per cent of GDP and rising.
The world’s governments cannot borrow their way out of the coming crisis. The money has already been borrowed and spent. It is no longer there.
We could, of course, print more, lending it among ourselves to stave off the inevitable for another year or two, but the end result will still be the same, with raging inflation and an even bigger debt bubble eventually bursting.
The world has arrived at this brink of economic failure by believing there is such a thing as a free lunch: that we can have it all and live beyond our means through the financial machinations of government and private borrowing.
However, as Charles Dickens’ Mr Micawber said, “Annual income, 20 pounds. Annual expenditure, 19 pounds; result? Happiness. Annual income, 20 pounds. Annual expenditure, 21 pounds; result? Misery.”
We should worry a lot less about climate change destroying civilisation. The debt crisis will end it much sooner unless we stop believing we are all entitled to something for nothing.
Is it too late? Unless you believe that human nature can change, it probably is.
References:
1. IMF Global Debt Monitor 2023. September 2023.
2. www.worldometers.info 2024.
3. www.ourworldindata.org 2024.
4. NZ Govt debt 41.7 per cent GDP. Private debt 138.3 per cent GDP. Total 180 per cent. www.ceicdata.com 2024.
5. “The Path to Growth.” IMF report, April 2023.
6. www.reuters.com 2024.
7. www.statista.com 2024
8. NY Times 30/01/2024
9. IMF Report. WP/19/83. March 2019.
1 comment:
Hear, hear! With that, together with escalating international warfare and a growing potential for a local race-based revolution, anyone who thinks that anthropogenic climate change is our biggest imminent threat really is an ignorant and deluded individual.
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