How much debt is too much? At the rate the world economy is packing it on, we may never know.
We’ve written before about the global economy’s addiction to debt. One of the main underlying causes of the 2008/2009 global economic crisis was debt: People and companies and governments and banks owed too much to each other.
You might think that the 2008-2009 global economic crisis delivered a crowbar-to-the-head message about debt: Too much debt is bad. But since then, overall levels of debt haven’t declined. Total lending has actually risen – by 40 percent. The world economy owes itself US$57 trillion more than it did in 2007. Total debt – money owed by bank, households, companies and governments – has risen by US$112 trillion, or 129 percent, since 2000. (And this data is as of 2014… debt has increased since then.)
How much is US$57 trillion?
57 trillion is 57 followed by 12 zeroes. It’s about as difficult to understand as the size of the universe – it’s far too big for our brains to handle. But we can try. US$57 trillion could buy every man, woman and child in Asia (population 4.4 billion):
- A new Hyundai Accent car, or
- A first class flight from Singapore to New York on Singapore Airlines, or
- 3 Louis Vuitton Twist MM handbags
And that’s just new debt since 2007 – on top of the US$142 trillion debt burden in 2007.
Governments are now the biggest borrowers
The good news, if you can call it that, is that the pace of debt accumulation has slowed. In 2000-2007, debt was growing at 7.2 percent per year. From 2007 through 2014, it grew 4.9 percent per year (compounded). However, the base from which this growth is computed has been increasing – so relatively slower growth isn’t much of a victory at all.
The rate of growth in household debt and bank debt slowed sharply. But governments have more than made up for that. The rate of growth of government borrowing (from 2000-2007, to 2007-2014) nearly doubled. Governments are responsible for 58 percent of the US$57 trillion of new debt since 2007.
And according to HSBC, a big global bank, governments are set to spend even more this year – the most since 2009. That was when governments opened the spending taps to deal with the global financial crisis. But governments don’t have savings to spend, this means they’ll be taking on even more debt.
Lots of new debt – but not much to show for it
What has this additional US$57 trillion in debt delivered? (It could have delivered every family on earth a fresh large Hawaiian pizza, every day… for six years.) For one thing, it was supposed to prevent another Great Depression – and it appears to have worked, best of all in the two years following the economic crisis, as shown below.
One of the troubling things here is that growth has been slowing since then – while debt has been increasing. Every unit of debt – every dollar, or billion dollars, or trillion dollars – has been resulting in relatively less growth each year.
The growth in global debt has also coincided with central banks cutting interest rates. And one of the reasons they cut interest rates was so that people would borrow more money to spend. This extra spending, it was hoped, would stimulate the global economy.
One big concern was that all of this extra cash would lead to inflation. Often, more money in the financial system leads to higher prices. But inflation has not been a problem at all.
In fact, the big worry now is deflation, or falling prices. Deflation is economic kryptonite because if people know prices are falling, they’ll postpone buying stuff (because they know the price will be lower later). This results in less money being spent to spur economic growth… and the economy slows down even more. Once deflation takes hold, it’s very hard to escape.
So, to avoid deflation, central banks have been trying to encourage more borrowing. And governments have been spending more – that is, borrowing to spend – to stimulate their economies and keep inflation at comfortable levels.
Has this strategy been working? Here’s the chart showing the world consumer price index (CPI), which is used to measure global inflation.
Again, the global economy did avoid an immediate disaster in 2009. But since 2011, inflation has been falling. It is now in a very uncomfortable spot near 1.5 percent. If it falls any further, global deflation becomes a real concern.
As far as stimulating the global economy and avoiding deflation, all the extra money governments have been spending hasn’t done much. But: Maybe things would have been even worse if they hadn’t spent so much money.
What happens next?
- Debt continues to rise. There’s no set level at which debt reaches the “too much” level. Global debt was incomprehensibly high when it hit US$50 trillion, and US$100 trillion… and what’s the real difference between US$199 trillion (the debt level as of 2014) and, say, US$300 trillion? There’s no line in the sand.
- But at some point, there is a line in the sand – and creating money from thin air goes too far. Governments that turn on the printing presses, through quantitative easing or other methods, create much of this new debt. Paper money is based on trust. And governments that abuse their power will – at some point – no longer be trusted.
- Hard assets that store real value will rise in price. Precious metals, including gold, have traditionally been a repository of value.
As the global debt load heads higher, investors should continue to be cautious. That means watching your stop-loss levels to limit your losses if markets tumble. And own some gold to act as a hedge against falling markets and currencies. You can do this by buying the SPDR Gold Shares ETF (Singapore, code: O87), or the Value Gold ETF (Hong Kong, code: 3081). And on the New York Stock Exchange you can buy the SPDR Gold Trust ETF (ticker: GLD).