The global debt problem, by Alasdair Macleod

If you’re only going to read two articles from SLL tonight, read this one and the next one. There’s only one inevitable “solution” to the global debt problem: a financial system crash and burn. From Alasdair Macleod at goldmoney.com:

It has been recently estimated that global debts stand at $284 trillion equivalent, representing 355% of global GDP. Estimates such as these must be treated with caution, and they probably underestimate financial sector debt. Furthermore, no allowance in these figures is made for OTC derivatives, which according to the Bank for International Settlements have a gross value of $15.48 quadrillion(!), netting out at $609 trillion.

This article comments on the different debt sectors: government, finance, non-financial corporate and consumer debt. It finds the dangers of excessive corporate debt have had the least attention, and that systemic risk in commercial banks is grossly underestimated.

The rapid growth of emerging market corporate debt is a recipe for a repeat of the Asian crisis in the late-1990s.

Ultimately, the whole debt burden will fall on government shoulders in their threefold attempt to protect the banks, stop a recession and to continue puffing up a wealth effect by inflating increasing amounts of currency into financial markets.

The trigger to end the debt crisis is almost certainly rising bond yields.

Introduction

Times of monetary expansion generate a shift in wealth from bank depositors to borrowers. Given that this year is the fortieth anniversary of the Nixon shock, when the world’s currencies finally came out as fiat, it is hardly surprising that each successive crisis led to the easier path of increasing debt instead of letting failing businesses and banks go to the wall. Kicking the can down the road has been the way to deal with every economic or financial blip. After all, it is argued, inflation reduces debt obligations over time.

Maybe, but it increases the net present value of future obligations to the ultimate destruction of welfare-driven states. This is why, if for no other reason, kicking cans down the road just ends up at some point with a pile of cans that can no longer be kicked. But politicians aware of mounting obligations and still doing the can-kicking believe that will be their successors’ problem, and you never know, something might turn up. After all, optimists argue, we survived higher levels of debt following the Second World War.

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