$250 Trillion in Debt: The World’s Post-Lehman Legacy

https://www.bloomberg.com/graphics/2018-lehman-debt/?srnd=premium

by rayvy • 8 years ago

222 195 8 years ago

apo• 8 years ago

After all, how can officials from the Federal Reserve to the Bank of Japan even pretend to know how to reverse what they’ve done over the past decade?

As I understand the US Fed plan, treasuries bought under QE would be allowed to mature without buying replacements. These assets were purchased with a variety of maturity dates. In other words, the bonds simply disappear on their own - not all at once but gradually.

The problem in Japan is much worse because the central bank has bought ETFs directly and is now a major holder.

https://asia.nikkei.com/Economy/BOJ-is-top-10-shareholder-in...

Any unwinding of the BOJ position would lead to major disruptions.

NTDF9• 8 years ago

Any unwinding of the BOJ position would lead to major disruptions.

That's just pushing the inevitable. A lot of stocks went up because of debt. Those stocks needed to come down. In a real capitalist system, the companies with declining stocks would be replaced by new ones. But BOJ intervened (for good reason) and now they are in a painful slow decline.

Pull a bandaid quick vs pull it over time!

joefranklinsrs3• 8 years ago

If there's one single life-encompassing economic event this decade, it will be the emerging market financial crisis. The chart in the article clearly shows emerging market ex China going from 16 trillion to 29 trillion in 10 years. And China has incredibly gone from 7 trillion to 40 trillion debt in 10 years - 300% debt to GDP (not even counting another 20 trillion shadow debt, which would make it incredibly 450% debt to GDP!!) ((and if you take into account fake GDP that Chinese provinces have reported, and that authoritarian governments typically fake their economic growth, and reduce the reported GDP by 20%, it's a jaw dropping 600% debt to GDP !!!))

The emerging market crisis will accelerate pretty quickly, as soon as one or two more fed rate hike occurs, or as soon as more tariffs get levied on China from US, or any of the other black swan event that may occur (hyperinflation in other emerging markets, internal politics struggle or death of Xi Jing Ping in China, etc) . Interesting times we live in. Stay safe.

AznHisoka• 8 years ago

So, should I be in 100% cash right now?

joefranklinsrs3• 8 years ago

My opinions are not of financial advice :) You can make money on a downturn as well as an upturn

_uhtu• 8 years ago

Don't try to time the market unless you dont have any cash savings. Have enough cash to last 6-12 months without a job and invest the rest. You'll do better that way than trying to time the market.

paulpauper3• 8 years ago

no, but you should avoid foreign stocks and emerging markets. I think the S&P 500 has a lot of juice left

joering24• 8 years ago

Not cash in form of paper money or coins, but rather silver coins, preferrably 80% pure. These are sold by bags by main silver sellers such as Monex.

The point being if economy goes to shit that beautiful $100 bill you can spend to feed your family with lobsters will be worth as much and only as much as the paper it was printed on (hint - close to zero). In such times we will revert back to hard currency - gold and coins. But don’t buy gold bullion - it will be hard to buy bread with a 15gr gold bullion bar and noone will care to give you change. Hence best are 80% silver bags as a form of daily purchasing power.

pjc506• 8 years ago

As a Brit I feel somewhat fuckup-proofed by being long US equity funds. Both EM collapse and Brexit £ collapse would benefit them.

I still have a couple of gold sovereigns from the last financial crisis, at roughly the same value I bought them. Mostly as a reminder to ignore the goldbugs.

paulpauper3• 8 years ago

emerging market crisis already happening in Russia, Turkey and Venezuela

rm_-rf_slash• 8 years ago

Could you provide information about Russia? I don’t see anything recent suggesting they are in a crisis.

Turkey is in a classic emerging market debt crisis, whereas Venezuela is a somewhat special case where oil prices are high and they have enormous reserves but they’re terribly mismanaged (to provide a huge understatement). Not saying you’re wrong about Venezuela, but they’re not the typical textbook case of an emerging market debt problem.

chesimov• 8 years ago

Contraction last 2 quarters in South Africa

gzu• 8 years ago

I wonder how well this comment will age. Interesting times indeed.

barrkel• 8 years ago

The debt only matters when people call in their chits. Debt, similar to money, us a claim on future production. As long as people are willing to wait, and not get paid too much for waiting, everything will work out ok.

We'll see if interest rates stay low long enough.

bdkoepke• 8 years ago

Emerging and international developed markets performed extremely well last year. Part of the under-performance this year is from the US dollar rising.

On an enterprise value basis the US looks more expensive than both international and emerging markets[1].

[1] https://allocatesmartly.com/asset-allocation-roundup-2/?aff=...

beat6• 8 years ago

Before freaking out about CHINA IS DOOMED, look at the historic record.

From 1957 to 2017, per capita GDP in China grew from $68.24 to $8830.17. That's over a thousand times more productive. You can angst about faked numbers or whatever all you like, but the trends are plainly obvious here. China's economy has grown consistently at an extraordinary rate for a long time now, and there's no obvious evidence that a collapse is just around the corner.

taurath• 8 years ago

In case anyone was wondering, $68 in 1957 is equivilent to $607 in 2018.

doctorpangloss2• 8 years ago

At what real economic cost? GDP, we’ve discovered, is an accounting method that doesn’t account for climate change, for example.

Maybe that doesn’t agree with your politics. How about all the people harmed by China’s wars? What about its own victims, like victims of the Great Leap Forward? The latter happened within its borders, but that reduces the denominator.

A one child policy reduces the denominator too. What would China’s population be today, its per capita GDP, if the denominator was larger?

Fine, don’t angst about faked numbers. But do you seriously believe that the GDP per capita isn’t massively hacked to the benefit of the CPC? And even then, is the average Chinese still being below the American poverty line something to celebrate?

Just because the number has grown doesn’t mean it would not have been higher in a free society.

joefranklinsrs3• 8 years ago

What an odd comment to make :) It's true you can ignore all economic reality and focus on growth (fake or real). But history time and time again has shown that NOBODY escapes economic reality. Nothing goes up forever.

"Debt, we've learned, is the match that lights the fire of every crisis. Every crisis has its own set of villains - pick your favorite: bankers, regulators, central bankers, politicians, overzealous consumers, credit rating agencies - but all require one similar ingredient to create a true crisis: too much leverage."

seanmcdirmid4• 8 years ago

No one significant is predicting a doom/collapse (which parent didn’t mention either, so I guess you are just putting out a red herring), but China is definitely due for a crash/financial crisis to wash out all of the economic bad blood/distortions that has accumulated from its rise. There is plenty of evidence that the real estate market will go bust in the next few years.

China could get stronger after a crash as it’s economy gets dosed with realism, or depending on how the government manages it, it could be in for a Japan-style lost decade or two.

tasty_freeze• 8 years ago

From 1957 to 2017, per capita GDP in China grew from $68.24 to $8830.17. That's over a thousand times more productive.

8830/68 = 130, not 1000. And is that $68 in 2018 dollars or 1957 dollars?

sonnyblarney• 8 years ago

It doesn't matter if they have been growing.

What matters is 'do they have more to grow'.

And even if that answer is 'yes' (and I think it is), the next question is 'how level will that be'?

Because the bag will change hands many times. There can be pops and bubbles.

There could definitely be crashes where some lose their shirts - and the system is broken enough that they are unable to actually achieve all of that growth that we know they can do.

Maybe other countries ramp up on manufacturing quicker than we thought.

Maybe factory automation outpaces china.

Maybe there's a conflict that pops a bubble, or internal unrest.

Heck - maybe Trump's trade war really pulls the rug out.

All possible.

candiodari• 8 years ago

Okay, let's look at history. Since about 3800 B.C. there have been something like 500 economic cycles.

499 of them have ended in a financial crisis. Most in minor debt crises, a few in larger events (like 1929 or 2008).

This one will end just like all others. There will be a financial crisis to end it.

I mean, this has been happening for so long the Bible talks about it. Trust me, trust economists, or trust the lord: it will happen.

There is another pattern. Crises, from one to the next, tend to get worse and worse until they cause really large scale collapses. The Roman Empire encountered worse and worse financial crises until finally the republic was destroyed by the empire, and eventually because the provinces broke away. The 1929 crisis ... perhaps this is a bit simplifying, but not really ... caused WWII.

On the other hand, the 1979-1982 crisis was pretty severe and yes was followed by a large expansion and a mild, at worst, crisis ended that one.

But this is not a stretch at all:

1) economic expansion (in China, the US, and elsewhere) WILL end (100% chance). And it will end soon (China, and the world for that matter, are in one of the longest continuous economic expansions in the history of the world. Meaning right now it's already very exceptionally long, if not THE longest)

2) it will restart. Maybe it'll take a war, maybe (1 in 100 chance at worst) even collapse. But it will restart. Now that's easy to see, but 1 year into the crisis that will inevitably occur that's not going to be so easy to see.

daxorid• 8 years ago

I'm not sure if you've been paying attention to equity prices. EM crisis, yield curve flattening, currency volatility, upcoming rate hikes, near-record P/E ratios, NONE OF IT MATTERS. Investors are bidding the ES and the QQQ to infinity no matter what the economic reality on the ground is.

kingkawn• 8 years ago

seems like its in china's longterm strategic interest to derive as much infrastructure and domestic development as possible from the international economy and then eventually crater it to defeat their international political enemies

fungi• 8 years ago

Is China's debt like Japan or Greece... i.e. does it owe itself (like japan) or someone else? If it owes itself would that not contain the fallout of a debt crisis?

PowerfulWizard• 8 years ago

I'm sure I've complained about this before, I'd love to read a similar article to this that compares two quantities that share the same unit. Debt is in dollars and GDP is in dollars per year. Those are different units.

For example, tax revenue versus debt service payments -- or where are the debt service payments actually going? Or future debt service vs future tax revenue under different scenarios. Or for that matter, what are the actual constraints to borrowing and how can they change.

nabla92• 8 years ago

Really good point.

In the US you can compare federal debt and debt payments easily if if you use "percent of GDP" as a unit.

(a) Federal Outlays: Interest as Percent of Gross Domestic Product, Percent of GDP, Not Seasonally Adjusted (FYOIGDA188S)

(b) Federal Debt: Total Public Debt as Percent of Gross Domestic Product, Percent of GDP, Seasonally Adjusted (GFDEGDQ188S)

Formula: a/b

The result: https://fred.stlouisfed.org/graph/?g=lcpR

---

ADDEDUM: Part of those interest payments is paid for the Federal Reserve who then pays them back to Treasury. In 2017 Treasury paid something like $262 billion interest and Fed pays $80 billion back to Treasury. Debt from government institution to another is not really worrying or 'real' debt. It's just accounting trick.

AnimalMuppet3• 8 years ago

Yes, you've complained about it before - more than once. (At least, someone has - I don't specifically remember if it was you.)

And it's a valid point. The units are wrong for them to be compared.

And yet, it's only half of a valid point, because the only thing people are doing with that ratio is comparing it to the same ratio for other years or other countries. The number can be dimensionally wrong and still be useful to use in that way.

Why would the number be useful to use in that way? Well, it seems intuitively reasonable to say that the bigger an economy is, the more debt it can carry without the debt burden being any more of a strain. The US can carry more debt than Vanuatu can, and not because the US government is more credit-worthy. So scaling the debt by GDP makes some sense.

And, in fact, dimensional analysis can make sense of this. Let's say the GDP is $10 Trillion. Well, it's not really $10 Trillion, it's $10 Trillion/year. If the debt is $30 Trillion, then the ratio is $32 Trillion / ($10 Trillion/year), which equals 3.2 years. That's how long it would take to pay off the debt using 100% of the GDP (which of course never happens, but it's still a measure of how much of a load the debt is). So when you see them report that debt is 320% of GDP, what they're really saying is that the debt load is 3.2 years.

nabla92• 8 years ago

This is also a good point.

But it's not as easy to interpret as you say. The currency, maturity distribution and interest rate of the debt are all important. If the average maturity is 20 years for 1%, it's completely different from 3 years and 5 percent.

Differentiating debt in foreign or domestic currency is even more important. In the US and Japan all government debt is in local currency. It's completely different problem from countries like Venezuela or Argentina that have also debt in foreign currency. Hyperinflation occurs only in countries with large debts in external currencies.

karambahh• 8 years ago

I don't understand why the comparison even makes any sense:

Let's say debt is equivalent to the mortgage on your house. You compare an individual exposure by their monthly repayment against their income, not income against mortgage amount! Why is it any different for this?

Usually in France, it's customary to allow this ratio to be 30%. With median income at 20k€, this leaves about 5k€/y, or 410€/month. At current rates, mortgage size of 100k€, total cost of 150k€. The "debt to GDP" is thus 150/20=750%.

Apples to oranges?

zaro• 8 years ago

It can be apples to oranges but it can be useful metric also.

I think of it as the higher the debt to GDP ratio is the longer/harder it will be to repay the debt.

stephengillie• 8 years ago

Dimensional analysis is an oft-forgotten but highly valuable part of financial understanding.

HIPisTheAnswer3• 8 years ago

A dollar is 24 3/4 grains of gold.

Sileni• 8 years ago

I don't even really understand how to hedge my bets anymore. It's not like there's an industry that will be left unaffected by the current economic climate and... well, the climate. What exactly am I supposed to be working on/towards if the system itself seems broken?

I'm down to "Hope the problems don't really precipitate in my lifetime, and don't have kids". I don't feel like that's a solution.

garmaine2• 8 years ago

What exactly am I supposed to be working on/towards if the system itself seems broken?

Replacing the current system with something better.

plussed_reader• 8 years ago

Any tips for the death and despair in the interim as 'something better' comes online?

eigenvalue• 8 years ago

The best you can do while preserving purchasing power is to diversify across asset classes with a big weighting to US equities.

nostrademons• 8 years ago

The current system is actually quite resilient, because it has the built-in capacity for parts of it to fail without bringing down the whole thing. The situation you should really be afraid of is when everything is fine, you're the envy of the world, the Supreme Leader has your back, right up until there's gunfire in the streets, people are scrambling across the border, there's no food in the supermarkets, there's suddenly a bloody coup in the capital, and enterprising oligarches have pilfered the country's coffers.

In practical terms, you should recognize that this feeling is fear and it is in fact a feeling, and you can choose to own it rather than let it own you. Stay away from the particular enterprises that everyone says are about to collapse, and double-down on whatever assets nobody is paying attention to. Life goes on, and people have to do something, so own the things that people will be interested in over the next few years. It's all a bubble, just do your best to ride it.

There were a few asset classes that were clearly looming bubbles in 2008: housing, CDOs, most hedge funds, Web 2.0 startups. If you were invested in them at the beginning of the year you probably lost your shirt. Meanwhile, if you invested in Bitcoin or mobile or sharing economy startups in 2009, you're likely a millionaire several times over. Housing itself started to become an attractive investment once the crash was over in 2010, with many landlords making 10%+ returns annually since then.

rsync• 8 years ago

"The current system is actually quite resilient, because it has the built-in capacity for parts of it to fail without bringing down the whole thing."

This is false. It is the hallmark of the current economic order that our systems are very efficient, very interconnected, and very fragile.

I shouldn't care whether or not provincial Chinese governors are faking their economic reports or making bad loans - but of course, I do, since that could have a ripple effect that makes my business suffer. I shouldn't be fragile to that but I am.

Making the system less fragile would require removing some of the interconnections and the efficiencies. Growth and returns would be lower, but failures would be localized and less "interesting".

rdm_blackhole• 8 years ago

That is a lie. If the system is so resilient then why did the governments had to intervene in 2008?

The financial system is quick to ask for less regulation/less red tape but when comes the time to own their mistakes, they are really happy to get some of that taxpayer money from the government!

We are living today in the biggest bubble of all times. It is the everything bubble. The stock market is hyperinflated with valuations that are completely disconnected from the real economies of the world.

Most of the major economies are so indebted that to even think they would ever repay their debts is just a pipe dream.

Most emerging economies have been having huge political and economic issues in the last few years as well.

Housing bubbles are popping up all over the globe. Major resources are dwindling and our ecosystem is starting to crumble while we are day by day emitting more and more carbon emissions in the atmosphere.

Finally using bitcoin as an example of a great investment is more than dubious. Bitcoin was a gamble in 2009 and is still a gamble today.

beat6• 8 years ago

The system seems broken only because our brains and society are wired to think negatively. Life has gotten tremendously better for just about the entire world over the past two centuries.

Here's a fun data point for you. From 1997 to 2017, the global extreme poverty rate (people living on less than $2/day) dropped from 29% to 9%. Two thirds of the people at the bottom got out of that bottom, in the past twenty years alone. That's amazing.

quickben• 8 years ago

It's is, but it still doesn't change the fact that venezuella sucks right now, not because of tremendous amazing progress, but math and movement of numbers people agreed on.

So, while all is amazing, all can be very non amazing on the receiving end of the liquidity removal.

patientplatypus• 8 years ago

Uhhhh....I remember reading the other day about how researchers worry that men could become infertile in a generation because plastic is an epigenetic endocrine disruptor. (https://www.gq.com/story/sperm-count-zero). And that's only the latest way in which the world could end in my lifetime outside of nuclear war, climate change (Cape Town came close to running out of water this year ffs), etc etc.

How you think we're all better off just because we're enjoying eating our seed corn I do not understand. Next year we will simply starve.

doctorpangloss2• 8 years ago

There will always be demand for food, for example.

Land in good climates. Don’t even worry about the houses.

Good education and shelter is pretty close, but not at all commodified or fungible. Real estate is complicated I guess.

ChuckMcM• 8 years ago

"Ammunition, cigarettes, and booze" that was the advice given to my great grandfather when he worried about losing everything in the depression.

The more pragmatic advice however is to hedge in real transactional things, food production, logistics, real estate, and manufacturing, Etc. That part of the economy that operates on barter if it has to because people need these things to live.

dillondoyle2• 8 years ago

I just bought some more 'vice' last week mostly because I have this fear, probably precipitated from Trump + a BUNCH of for sale signs popping up when I almost never saw an actual sign go up over the last 5 years. I assume I'm not the only one afraid although consumer confidence seems to be up as of August at least.

xiphias2• 8 years ago

The main hedges for the financial system breakdown are physical gold, silver and (my personal favourite, although much riskier) Bitcoin (though make sure you use a hardware wallet if you want to own it).

roymurdock• 8 years ago

this is a bad article

it harps incessantly on debt, throwing out scary, big numbers ($250T! $40T in china!) but doesn't explain why increasing government debt is an issue

there is a reason to worry if the interest rate on the government debt is larger than the growth rate of the economy

currently that average interest rate is below 3 percent [1], so for any countries with >3% economic growth, it really doesn't matter - they'll be able to make their interest payments to one another (most big holders of gov debt are other govs themselves)

financial and household debt is down across developed economies, and corporate debt is about the same as it was in 2008

furthermore there is no discussion of what could trigger a debt collection death spiral/meltdown, other than "the world's second largest economy is now coming to terms with rising corporate defaults", backed up by 0 context or data

the real worry would be continued slowdown in GDP growth ala "secular stagnation" that many prominent economists are exploring - if you're not growing your income, you can't pay down your debt, and you have to start cutting costs (healthcare, education, defense)

debt has a bad connotation and is easy to sensationalize, so articles like this get attention, but there's no news, argument, or takeaway to be had from reading it

[1] https://www.nytimes.com/2018/09/11/opinion/on-the-debt-non-s...

pas• 8 years ago

re. stagnation:

https://www.project-syndicate.org/commentary/secular-stagnat...

jdkuepper• 8 years ago

Dollar-denominated debt in emerging markets is the big exception. If the dollar rises, those debts become more expensive to repay, regardless of the emerging market's underlying economy. That's why Ukraine, Argentina, Turkey and Brazil have seen the recent volatility.

The question is whether these problems are limited to those countries with high dollar debt or whether it could cause a regional capital outflow that reduces economic growth in neighboring countries or trade partners.

jondubois2• 8 years ago

> currently that average interest rate is below 3 percent [1], so for any countries with >3% economic growth, it really doesn't matter - they'll be able to make their interest payments to one another

What does 3% economic growth mean? Is it measured in terms of that country's own currency? But isn't that currency's value inversely proportional to the amount of money which was borrowed from the Fed? So the higher the interest rate is, the more new money the government has to borrow from the Fed in order to pay back its old debt, the less the currency becomes worth, the less meaningful this 'economic growth' percentage becomes (because that growth is measured in this fast-deflating currency). This seems to be mind-numbingly complex.

ArchTypical• 8 years ago

Is it measured in terms of that country's own currency?

No. The obvious makes that a useless measure. GDP is used, modified to ignore what government factions like to conveniently manipulate or modify. Lumping in tech stocks and pharma was the latest trick in the USA.

pjc506• 8 years ago

Reminder: $250t debt is $250t assets on someone else's balance sheet. The money is not owed to aliens but to other humans.

Finding who is is owed to is harder. A big chunk is pension funds, insurers and so on, where one person's debt is another person's retirement savings. Which must increase overall as life past retirement does.

But a large chunk is assets of financial industries and the super wealthy, and in order for it to be net paid down they have to get poorer - or at least be forced to reallocate to equities.

(Note also that as interest rates drive ever lower debt naturally expands too. If they can be driven negative it becomes an advantage.)

swingline-747• 8 years ago

True. It's important to remember debt isn't a perfectly liquid asset because one or more countries may decide it's not worth repaying, then it becomes tantamount to a pyramid scheme of borrowing. If/when that happens, the power of the West may fall into slightly different hands of mafia-types as did the Soviet Union. Greece also comes to mind.

solotronics• 8 years ago

One interesting thing to consider is that countries holding larger and larger amounts of each others debt could be stabilizing in geopolitics. If your neighbor owes you $100 you aren't going to punch him because you would never get the money back.

pjc506• 8 years ago

Default is definitely a thing, as are bondholder "haircuts", but that's what the IMF is for. They're coercive but not corrosive to the rule of law like mafia. Former Soviet union oligarchs came about due to privatization rather than debt.

ellius• 8 years ago

One of the most illuminating comments I heard recently was on a Bloomberg podcast where they made the point that fiat money is a closed system. Money can flow between economic actors, and it can obviously influence behavior, but in both a theoretical and real sense it is really just an abstraction that hovers above the physical world. That's not to deny the economic effects of monetary policy, but I do think it helps clarify a lot of monetary phenomena.

pjc506• 8 years ago

Yes. It's deeply out of fashion but trade balances are also important. If your country is producing more than it's consuming then debt is unlikely to become a problem.

bduerst2• 8 years ago

Yep, but the same applies to debt as well. A contractual IOU may say seem abstract but it can be almost as valuable as the money itself (sometimes more valuable, with attached APR).

whatever1• 8 years ago

It is not exactly closed. We also pump new money into the system based on our models for the actual increase of the gdp. Many times our models are off and we create inflation because of this (even if someone has no agenda).

sunstone• 8 years ago

Language and mathematics are two more abstractions that "... hovers above the physical world."

pishpash• 8 years ago

You should clarify that "assets on someone else's balance sheet" refers to paper assets, which by itself is nothing but a claim and may be as good as no assets. You'd have to track down the use of the debt to find out if there are real assets anywhere.

maxxxxx• 8 years ago

Wasn't that pretty much the problem of the financial crisis? That a lot of institutions had nothing real on their balance sheets but only paper value which could disappear instantaneously if perceptions change?

MichaelMoser123• 8 years ago

Do the rich have to pay interest on their debt, or is it just me who has it on his mortgage? I tend to avoid taking loans because of the riscs and because of interest, why do the rich take up this debt?

benmanns• 8 years ago

Generally you take out a loan at X% if you have some opportunity that will pay back >X%.

Also, loans can help with liquidity. I'd rather have $1,000,000 cash and $999,999 in debt than $1 to my name. You can work with a million dollars in ways you can't with $1, even if your net worth is the same.

TheCondor• 8 years ago

Everyone pays interest, the rich just pay less because they are less risky.

mathattack• 8 years ago

A rich person might rather buy 5 houses with a 20% down payment and 80% debt rather than 1 house with cash.

abernard1• 8 years ago

Reminder: $250t debt is $250t assets on someone else's balance sheet. The money is not owed to aliens but to other humans.

The problem is there is no guarantee that those assets on the balance sheet are actually real. This is a global aggregate which is owed from humans now to humans in the future, and using micro-scale accounting identities isn't appropriate.

Those graphs are indicating that real production is insufficient to meet future consumption. When that happens, there are serious consequences.

Those consequences can take the form of deflationary writedowns, an inflating currency, or a combination of both. Whatever the case, the the people of the future don't get the results the people of the present have promised.

cma• 8 years ago

You can't judge things based on a 0% default rate. Some of the debt is expected to never be paid back. Lots of high interest debt heavily bakes that in, so counting them as held to maturity with 0% default is just going to make your statement tautological.

roenxi• 8 years ago

Finding out who owns the debt is harder. Figuring out who will be pulled in to help unwind the debt in a large-scale default scenario is well nigh impossible, because there seems to be a real risk of the losses being socalised to someone. Mentioning that the Cyprus bail-in [1] could happen anywhere makes me feel like a conspiricy theory; except it happened and there is no reason it couldn't happen elsewhere.

$100,000 sounds like a lot until you do the figures on what a responsible person needs to save if they don't want to wear the risk of the social welfare system comes under sustained attack while they are trying to retire. That sort of possibility is ugly, but you'd be mad not to acknowledge it as a potential threat.

I suppose the ultimate point is that when debt becomes unpayable, someone has to wear the losses of assets suddenly ceasing to exist. Anyone with meaningful savings is at risk in a big system-wide events because even if you understand the situation very well the rules can change in a crisis, making it very hard to control risk.

The numbers are bigger now, wages aren't that much better, savings are as low as ever. If 2008 was bad, the next one could be worse in terms of wiping out wealth. Scary time to be facing retirement.

[1] https://en.wikipedia.org/wiki/2012%E2%80%9313_Cypriot_financ...

mycall• 8 years ago

Which must increase overall as life past retirement does.

I thought age expectancy is starting to drop now.

kibwen• 8 years ago

In the U.S., certainly: https://www.cnn.com/2017/12/21/health/us-life-expectancy-stu...

Gustomaximus• 8 years ago

Reminder: $250t debt is $250t assets on someone else's balance sheet.

It's only an asset when people believe they are to be repaid. It's not uncommon for a debt holder to value debt lower than the amount.

So in a perfect world debt = assets, and then some. This conversation is about a possible stressed system. In this scenario it's not fair to say debt is equal to assets and therefore all is ok.

racecar789• 8 years ago

On the books...debt/liability is offset with either an asset or "expense".

An asset has enduring value, it remains on the books year after year.

An expense however, is only on the books for the current year, then it gets rolled into owner equity. Expense shrinks owner equity. In fact, owner equity can go negative in extreme situations.

A portion (I'm not sure how much) of the $250t in debt was certainly spent on expense. There is no way to get that portion back...the funds do not exist.

fspeech4• 8 years ago

Asset and debt are balance sheet quantities. They can be measured at a point in time. Revenues and expenses are flows on the P&L. They are measured over a period of time.

lixtra• 8 years ago

But a large chunk is assets of financial industries and the super wealthy, and in order for it to be net paid down they have to get poorer - or at least be forced to reallocate to equities.

Do you have better data on the super rich? My impression was that they typically own companies and stocks, not T-bills. So if the top 10% don’t own the debt, it’s the next 40% (middle class) that will have to get poorer to reduce debt.

mempko3• 8 years ago

One thing to keep in mind is that government debt is private sector savings. The money in your bank account originated as government spending or private sector borrowing. All money is debt. If the government pays back it's debt, it will make it impossible for you to be solvent. If there was no government debt, there would be no money.

The US government was in debt since this country started, and will remain in debt in the future. The government being in debt is no problem, it's not a household. Government debt is not a problem, private sector debt is.

everdev2• 8 years ago

I remember the national being a huge issue in the 80s (and probably before). This send like important and scary reporting but I'm not sure how this time is different from all the other alarm bells over the past 40+ years.

Is this a case of people calling wolf or is this a real crisis just decades in the making?

opportune2• 8 years ago

This isn’t about national debt but global debt. The US national debt at present is not much of an issue because the dollar is strong and interest rates are still quite low. The risk is for less economically strong countries who are susceptible to changing foreign interest rates / exchange ratios.

everdev2• 8 years ago

no one is quite sure what happens when a global superpower like Japan reaches a debt-to-GDP ratio of 224 percent. The U.S., U.K. and France have all surpassed the 100 percent level

It sounds like the author is nervous about the rise of US debt as well.

cs7022• 8 years ago

This is an alarmist article that ignores lots of important details and vastly oversimplifies things.

For example, few people realize that one of the largest owners of US Treasuries and US government sponsored enterprise (i.e., Fannie, Freddie, and Ginnie Mac, or collectively the GSEs) debt holdings is... the US government itself, via the Federal Reserve. As of yesterday, the Fed owns and is earning interest income on $2.3 trillion of treasuries and $1.9 trillion of GSE debt.[a]

In other words, the US federal government and GSE-guaranteed borrowers owe $4.2 trillion to... the US federal government itself.

Among other things, this means the US treasury is currently paying annual interest on $2.3 trillion of US treasuries to the Fed, and at the end of the year the Fed hands over all that earned interest to the US treasury, in perfectly circular fashion.

This startling fact is just one of many -- many! -- important details about modern monetary systems that are generally poorly understood by the public and which are utterly ignored by this article. Don't waste time reading it.

[a] https://www.federalreserve.gov/releases/h41/current/h41.htm#...

mastermojo• 8 years ago

It was hard for me to gauge what percentage of total debt that is, so a quick search indicates that by end of year 2018 the US government debt is going to be 21.4 trillion.

Roughly 20% of US government debt is held by itself.

mikeash• 8 years ago

I believe it's more than that. The Social Security trust fund holds another ~$3 trillion in federal debt.

stonemetal• 8 years ago

According to the national debt's Wikipedia page 5.7 trillion is owned by the government. That ends up being about a forth of it.

rwc• 8 years ago

Do you have suggestions on books or other sources that would enlighten me on these details?

illumin82• 8 years ago

This video: http://www.economicprinciples.org/economic-principles/index....

sschueller• 8 years ago

Is there a good source explaining how this whole thing works?

How do we know that the US isn't just printing this money out of thin air (as in money that is not declared to have been printed)? The system seems extremely complex which worries me that such things might be going on.

As the global reserve currency the US has way more power than a country like Venezuela and in my view could be getting away with printing extra money.

illumin82• 8 years ago

Yes, this video explains in very easy to understand terms exactly how all of this works:

http://www.economicprinciples.org/economic-principles/index....

edit: It is a 30 minute video by Ray Dalio, founder of Bridgewater Associates, one of the largest and most profitable hedge funds.

fspeech4• 8 years ago

The Fed does pay interest on excess reserves these days so the portion of debt that comes from issuing zero interest obligations (namely dollars) is not as large as it seems. As it currently stands, excess reserves are around $1.8T: https://fred.stlouisfed.org/series/EXCSRESNS

cs7022• 8 years ago

Yes. My comment was meant to illustrate sharply the utter lack of depth of this article, without going into too much detail... but thank you for pointing that out :-)

daddyofive• 8 years ago

What a wonderful article. I think that there are two sides to this coin: the nature of the debt and the nature of the repayment. Even the smallest and most well mannered debt is a problem if there is no path to repayment. And even large, nasty debt is ok as long as the people borrowing have done their homework and have a solid plan to repay. So this article did a great job of profiling the debt but it didn’t go into enough detail about the borrowers. If interest rates have been so low, and the borrowers have been somewhat lucid, even this large debt can be paid off without any crisis?

megaman8• 8 years ago

I see no intention from governments of ever paying off that debt. All I see, worldwide and US is more and more spending. At one point in the future we won't be able to pay for it anymore. So, what happens if everyone finds out they're not getting their money back? i hope we never find out.

30% of US debt is owned by intergovernmental agencies: like Social security/medicare/military retirement funds - so that might go down the tubes.

The other 70% of US debt is public debt, of which almost half is owned by foreign governments and investors.

https://www.thebalance.com/who-owns-the-u-s-national-debt-33...

zanny2• 8 years ago

Its turtles all the way down. US debt isn't just money the US owes some guy sitting on a pile of money. The debtors owe debtors owe debtors - nobody has a Scrooge style money pit sitting around.

It is a house of cards, but it isn't one with a clear winner and loser. A loss of faith in international credit destroys all economies.

mempko3• 8 years ago

If governments paid off their debt, there would be no money. Money IS debt.

appleflaxen• 8 years ago

you keep posting this all over the thread, but it's not true.

money requires no interest payment.

debt does.

jondubois2• 8 years ago

The current system seems extremely fragile to me; it's as if the tiniest miscalculation in terms of government debt versus economic growth could set a country on an irreversible course to hyperinflation (with respect to other countries' currencies). It seems ridiculous that governments have the power to seal the financial fate of their citizens in this way; irrespective of the actual economic output of those citizens. I think this makes a strong case for cryptocurrencies; citizens should be allowed to choose a currency which reflects their own level of financial discipline (and not that of their government).

thomasmarriott• 8 years ago

"The system is insolvent. No one knows what to do next — except repeat the insanity till the next bubble blows. That'll be the one. The big one."

— Gekko, Wall Street 2, 2010

#thewayoutisup

ArtWomb• 8 years ago

Wow. I assumed global deficits were approx $50T in the QE-era. With Global World Product (GWP) ballpark $75-100T. And annual global growth rates averaging 3-4% in good times.

Even with old numbers. And the assumption interest rates will remain below historical means. There is the possibility creditors can never be paid back.

But with these new estimates of 3X leverage? Time has come to think seriously about debt relief and cancellation. Not top down this time, but bottom up. Starting with direct injection into student loans, home mortgages, medical, small business loans, etc.

paulpauper3• 8 years ago

Debt relative to GDP according to the chart shown in the article went up 14% in a decade from 280 to 380 trillion, which does not seem that bad imho. Relative debt is more important than nominal debt.

techie128• 8 years ago

Why is there no mention of India?

DesiLurker• 8 years ago

This is a bit older but good background presentation by Richard Duncan: https://vimeo.com/101487179

PS: Ignore the title

mirimir• 8 years ago

Because of that, the fretting about the Fed’s current balance-sheet runoff plan is almost comical. There’s simply too much debt in the system and no clear path to truly paying it off. Not even central bank officials are pretending they’ll shed all their holdings — estimates fluctuate around ending at $2.5 trillion.

I thought that the plan was to eventually inflate the debt away. But maybe that's just cynical conspiracy theory.

dr_win• 8 years ago

To truly understand how bad it is, we would have to analyse the 250T figure in more detail.

There is a "free debt" component to it which was generated via seigniorage[1] and "real debt" to people, companies and other economic actors. It seems to me that many commenters here see only one part of it.

To illustrate it, let me give you an example how "free debt" can be generated by a government. Imagine for a second that we have one world government (WG) and one world currency. And assume that we are in a peace time when collective world productivity grows 3% every year. World's central bank (WCB) targets 2% inflation. Also assume that velocity of money[2] is constant and in general people's behave the same in time. This effectively means WCB can "freely print" 5% of new money without causing any real problem. But who should get the new money? Instead of simply printing it and directly giving it to someone, they have pretty sophisticated/obfuscated mechanisms how to introduce the new money to the system. Typically part of that new money is given to the WG in exchange for WG's bonds. The new money is effectively introduced as an interest-bearing debt. But please note that this debt is "free" for WG. WCB will never want to repay the debt (by allowing WG's debt to always roll over). And also note that WCB is part of WG. That means the collected interest WG formally paid to WCB is then given back to WG.

Of course WG can also sell bonds to people, companies and other actors. This debt is the "real debt" which must be paid back. But let's assume WG is prudent and does not do that.

You can observe that WG can continue this as long the world productivity is growing better than -2%

The problem with "free debt" comes when the growth is even worse (e.g. in war times) or when velocity of money gets faster suddenly (or there are other inflation pressures or shocks). WCB should reverse this mechanism in this bad case. It has to "pump excess currency out of the system" by selling its bonds and destroying the currency to hit the 2% inflation target (technically it would do it by not allowing complete rotation of WG's debt).

Of course real world scenario is much more complex than that. And real governments additionally take "real debt" where usual rules apply. The question for us is how big part of those 250T is the "real debt".

[1] https://en.wikipedia.org/wiki/Seigniorage [2] https://en.wikipedia.org/wiki/Velocity_of_money

HIPisTheAnswer3• 8 years ago

Using 150k tonnes of above ground gold, if all of it was minted into currency, would equal +- 100M dollars. Probably not more than 10% is minted currency coins - .999 isn't for currency use. So there is about 10M dollars in existence.

CompelTechnic2• 8 years ago

1200 USD per ounce x 16 oz per lb x 2000 lb per ton x 150,000 =5.76E12 USD

5,760,000,000,000 USD, except for the fact that Troy ounces are slightly different than normal ounces. Too lazy to look up.

HIPisTheAnswer3• 8 years ago

a dollar is 24 3/4 grains of gold.

edit:typo

stretchwithme2• 8 years ago

Isn't that $35K for every man, woman and child alive? How can that be?

EGreg• 8 years ago

The difference between debt-money and value-money is that debt-money is supposed to originally be backed by cashflows of value-money but is really paid back by an ever expanding amount of debt-money.

In other words, things are getting more and more leveraged. The amount of money to actual goods and services is exponentially increasing. So the value of money steadily decreases and we get inflation.

The danger is that this money evaporates as people default on loans.

As long as interest rates are low, people don’t default very much, but as they rise, the defaults happen.

Why do central banks need to raise interest rates at all? It just leads to a bloodbath as some loans get renegotiated.

Why not just have one predictable interest rate like Milton Friedman spoke about?

It seems to me that the central banks fix the next crisis by QA and low base interest rates. Why not just keep them low and let people default for actual reasons, instead of having a terrible time taking out a loan during high interest rate season?

If our money supply is going to be so debt based, why raise base interest rates? To “reload” so you can swoop in and save people from a money supply crunch you induced?

mempko3• 8 years ago

Before you read the article, keep one thing in mind, Money IS debt. If there is no debt, there is no money. Another way of looking at government debt is private sector savings.

axilmar• 8 years ago

Would it work if all debts on Earth were simultaneously erased by creating the relevant amounts of money?

$250 Trillion in Debt: The World’s Post-Lehman Legacy

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