$250 Trillion in Global Debt: How Can That Be Paid back?

-edited

Global debt just topped $250 trillion. Please ponder paying the interest on that, let alone the principal.

Global Debt $250 Trillion and Rising

Please note that Global debt surged to a record $250 trillion in the first half of 2019, led by the US and China.

What about Global GDP?

Global GDP

Global GDP Numbers from the World Bank.

To get a $1 rise in GDP it takes about a $3 rise in debt.

Things keep pointing back to 1971.

I have written about the importance of 1971 many times, most recently in Nixon Shock, the Reserve Currency Curse, and a Pending Dollar Crisis

Dollar Crisis

A reader asked the other day what I meant by "dollar crisis".

What I meant to say was "currency crisis" and the above title is now changed.

Since the dollar is still rising (thanks to European, Japanese, and Chinese tactics), It may take even bigger US deficits before something major breaks.

On that score, both political parties in the US are poised to deliver increasing deficits as far as the eye can see.

Meanwhile, negative interest rates are destroying the European banks. For discussion of this important issue, please see In Search of the Effective Lower Bound.

US Picture

Currency Crisis Awaits

$250 Trillion in debt. How will that be paid back?

I expect an uncontrolled collapse of a major currency, debt market, or bank system that cannot be funded. It is hard to say where it starts but I doubt it starts in the US.

Chinese and European banks are in far worse shape than US banks. European banks are getting hammered by negative rates.

Japan still struggles with decades of Abenomics.

The Fed and Central Banks brought this on by refusing to let zombie banks and corporations go under and insisting on cramming more debt into a global financial system choking on debt.

But this all has its roots in 1971. Central banks are the enablers, but Nixon Shock set things off.

A currency crisis awaits but the timing and conditions of the crisis are not knowable. It can start anywhere but I suspect the EU, Japan, or China as opposed to the US.

Ponder even paying the interest on $250 trillion, let alone the principal. What interest rate will it take?

Meanwhile, please reflect on gold.

Gold is Not a Function of the US Dollar Nor is Gold an Inflation Hedge

In the link below I post charts that make a mockery of the claim gold is some sort of inflation hedge or tied to movements in the US dollar.

But if Gold is Not a Function of the US Dollar Nor is Gold an Inflation Hedge, what is it?

Here's the answer.

If you think central banks have everything under control, gold is not where you want to be.

If you think otherwise, gold is where you want to be.

Do central banks have everything under control?

Addendum

My friend Pater Tenebrarum at the Acting Man Blog just pinged me with this pertinent thought: "The answer is of course: It won't be paid back. And since every debt is someone else's asset, you can imagine what that ultimately means. A great many people are a lot less wealthy than they think. It is all phantom wealth that can disappear in an eyeblink."

Mike "Mish" Shedlock

Comments (57)
No. 1-32
FloydVanPeter
FloydVanPeter

Intriguing. Thanks, Mish. Could you explain the $250T vs $72.8T? How much of the global debt is USD denominated?

Scooot
Scooot

I admire your confidence in the USD. I’m not very keen on fiat currencies in general but wouldn’t want to choose one over the others.

WCVarones
WCVarones

#MMT

Bam_Man
Bam_Man

"Gold is money. All else is credit." - J. P. Morgan

stillCJ
stillCJ

Editor

That's what I was thinking: it will never be paid back (as in, down to nothing). It's really just a big Ponzi scheme, borrowing new money to pay off the old debts. It is kicking the can down the road. It is making it someone else's problem in the future. la la la

Maximus_Minimus
Maximus_Minimus

Debt and interest rates are in a vicious feedback loop. By lowering the interest rates, more debt is piled on, which in turn requires still lower interest rates to prevent this scheme from collapsing. How long can this go on?

True that Nixon started it, but the ball started rolling later under Greenspan's "leadership". Globalization and liberalization of finance made the situation more precarious due to interest rate arbitrage. There're no lifeboats.

The PT addendum is scarily spot on.

CautiousObserver
CautiousObserver

Powell recently testified that the debt does not need to be paid back. The only thing needed is that economic growth of the private sector needs to increase faster than growth in government borrowing, and the rest will take care of itself. He also said it is up to Congress to figure out how to achieve this before the Fed put expires. (The Fed is kicking the can on asset prices with QE and artificially low rates.)

Meanwhile, public sentiment that makes people willing to overpay for richly valued assets using borrowed money is obviously not ever going to shift. So, everything is fine, right? RIGHT?

Bam_Man
Bam_Man

I still believe that a potential way out is to go back onto a pre-1933 Gold Standard with Gold re-valued astronomically higher. This would have the effect of raising the general price level significantly, thereby reducing the debt burden on households and governments. I just don't see any other way.

dagnyg
dagnyg

That's one reason why President Nixon is known as "tricky dick"

SMF
SMF

All people have to do is look back at history, even recent history, to see what worked and what didn't work. I cannot recall even one instance of a debt problem being solved by more debt.

Casual_Observer
Casual_Observer

This is a shell game but most of that debt is already monetized by central banks around the world. The game will continue with central banks taking on more "assets" on their books. At some level it is simply numbers in a spreadsheet and not real money. If any entity ever tried to get its debt out the system there would be multiple bank runs around the world. This is why they limit transfer and withdrawals and continue the repo interventions. The entire global banking system is reliant directly on central banks which have the authority of central governments around the world.

Yancey_Ward
Yancey_Ward

It will end the way it always does- with a new currency and with old debt terms rewritten to pay it off at deep, deep discounts.

Carl_R
Carl_R

Any country whose debt is denominated in their own currency can pay it back....once. They can just issue create new money, and pay it. That, of course, has two ramifications. The first is a huge inflation from creating so much money at once. The second is that no one will want to take debt denominated in their currency again, at least for awhile. The problem is that, unless they are running a surplus, paying it off once does no good, as they will be back in debt quickly, and the next time, the debt will be denominated in something other than their own currency.

As for countries whose debt is denominated in something other than their own currency, when they try to issue more currency to pay the debt, their currency loses value, and they get nowhere. The result is hyperinflation.

Tengen
Tengen

Always comforting to think that there really is no endgame here, they're going to keep printing until the pitchforks and torches come out around the world. Even if they can keep these "markets" green, they can't mask what's happening in the real world. So much for the Greatest Economy Ever!

The silver lining is that central bankers won't let the scheme fail soon, so we all still have time to prepare for the inevitable.

bradw2k
bradw2k

No pitchfork or currency collapse is going to do most of us any good. Rephrasing one of Mish's axioms about the Fed: every crisis, big or small, is going to be used by the powers that be to transfer as much of the remaining wealth and power as possible to themselves. ... The only good way out is for US voters to wake up, end the Fed, balance the budget, and legalize gold as money. The Tea Party movement was handed a golden opportunity to move in that direction, but it's been 10 years and we still can't even get an Audit the Fed bill passed. Instead the Fed-government is executing a stealth takeover of the entire banking system, while the whole country is going full libtard and talking about socialized medicine, without even the sliver of courage required the call it that.

Greggg
Greggg

You can plow your dollars into assets but then you eventually need to cash them out at some point. If it's in real estate, you may end up getting taxed to death as local pensions become due... try and sell at that point and you have no decent bidders. Physical gold if you can protect it from the FDR type politicians that will need it to back another fraudulent money scheme.

caradoc-again
caradoc-again

If an asset can't be hidden or moved it's an easy tax target.

Next up, attempts to reclaim some of the value of bid up assets via tax take. Any asset, it won't matter what type.

Will start with the super wealthy and then slide down to the plebs. Once the genie is out if the bottle there's no going back.

tz3
tz3

It depends on 250 Trillion WHAT. 250 Trillion grains of sand? 250 Trillion bookkeeping entries? 250 Trillion PonziBlockChainCoins? 250 Trillion Zimbabwe or Venezuelan "dollars". Easy peasy! Owe all you want, we'll create more out of nothing - literally since currency is virtual.

Now if they owed more gold than was available in storage, or in mines, or in the Earth's crust, earth, local planets, within 30 parsecs... it would be a problem. Or if they owed even grains, pure water, or something else tangible.

Six000mileyear
Six000mileyear

I'm very surprised household debt grew more slowly than any other category. Corporate debt is my pick for the needle that pops the bubble. Corporations have been borrowing for share buyback and leveraged buy outs. Little new corporate debt is being used to grow the business; therefore, corporate debt is not self-liquidating.

numike
numike

“I sincerely believe that banking establishments are more dangerous than standing armies, and that the principle of spending money to be paid by posterity, under the name of funding, is but swindling futurity on a large scale.” ― Thomas Jefferson

Knight
Knight

What are you going to do with gold when something does “break”? Where are you going to store it? Let others store it? You think governments cant take it? How are you going to use it? Can you eat it? I don’t have good answers to these questions and nor does anyone else when things do come unhinged. It strikes me in a major collapse of debt that the best you could really do would be cold hard cash in a safe in your basement. I like gold, I just don’t know what I would do with it in a world where the rules are made by someone else and assets like gold can be taxed to infinite and/or made illegal. Gold is not a function of the US dollar, nor is it a hedge on inflation. NOR is it a hedge on what governments are capable of.

Felix_Mish
Felix_Mish

And here's the GDP graph in a less misleading logarithmic form:

truthseeker
truthseeker

I’m shocked! I have to admit that even the serious cultural problems I have spoke of many times on this blog before have their beginnings with the closing of the gold window back in 1971. LBJ’s guns and butter spending on the great society programs as spending on the war in Vietnam started moving up, debt began to worry responsible people even way back then. Jumping way ahead to 1999, Glass-Steagall was repealed. This gave the bankers free reign-with the approval of Alan Greenspan-to create new derivative products referred to later as weapons of mass destruction. When all these super leveraged products began to blow up in 2008, Hank Paulson went screaming to President Bush and the Congress for 800 billion to get the banks open and stall a worldwide financial meltdown. Later Bernanke came along with QE 1,2 and 3. To get to the point I’m finally trying to make is that all this debt here in America and around the world has made it impossible for savers to earn a fair rate of return since interest rates are so low. That’s it! Now financially America and the rest of the world is in so deep, a crisis so unbelievably dangerous is a foregone conclusion!

Augustthegreat
Augustthegreat

You need to think out of box: governments can keep increasing debts forever and do not need to pay back interests and debts! Debts ate just 0s and 1s in your imagination!

leicestersq
leicestersq

Good analysis and the next question is what will governments and central banks do when something does break?

The two basic choices are print and bailout, or allow the defaults to happen.

My guess it is the former. The problem with the latter is it is easy to see how the real economy just seizes up as all of the banks go down as everyone tries to withdraw what money they can. Without enough money to fund the productive part of the system, the collapse could be society ending.

The problem is that they cant print forever without completely destroying money itself. So that strategy will also need to include bringing about a balanced budget and sensible interest rates, and the end of supporting bankrupt banks. Could anyone trust politicians to do the right thing though?

MaxBnb
MaxBnb

I believe this: "The wicked borroweth, and payeth not again: but the righteous sheweth mercy, and giveth" (Psalm 37:21). In contrast, most Americans have trusted the wicked, who will not repay. They have trusted the wicked to show mercy and give.

Konba
Konba

In the space.

RonJ
RonJ

"Things keep pointing back to 1971."

Things in 1971 point back to things before 1971.

ksdude69
ksdude69

Wont be paid back but probably wring us dry in an attempt. I usually turn off the politicians that talk about paying the debt off. What that means is slashing their costs, raising taxes etc in order to prolong the game and keep their sorry ass in a high paying job that much longer along with prestige and limo rides.

FromBrussels
FromBrussels

SO WHAT ? When you come to think of it, within the context of todays' ongoing Ponzi scam , the difference between a billion and a trillion is merely TR....innit ?

Jdred
Jdred

Question : (and no I don’t think it will be paid back..) but that’s an aggregate number right so couldn’t the actual amount to pay back much less? I.e: if 20 people all were in debt to one another 100k. The first pays off his debt to the second . The second person in turn pays off his debt to the third with the same 100k and on and on . Like the money multiplier right? What am I missing?

Irondoor
Irondoor

I've got one problem with your "no one loses" scenario. If I worked and saved $1,000,000 and loaned it to someone who, through poor decisions or bad luck, cannot repay it and declares bankruptcy, I only receive the current value of his assets. Bankruptcy generally occurs during difficult economic times, thus the value of his assets could be down 50% or maybe much more.

Your thesis says that the assets he hands me are somehow "valuable", and I agree to an extent. That's the same theory of returning to its rightful owner. But I have lost 50% of my $1,000,000 of purchasing power at the time of the exchange. How do I recoup the $500,000 of lost time and effort that I put into accumulating the $1,000,000 that I loaned the bankrupt? Perhaps the assets will go on to become very valuable, but that's not the bargain I entered into when I loaned the money. If I wanted equity, I would have made equity investments myself.

I've come to the conclusion that if you are a lender, you are in business with your borrower, like it or not. The only borrower who has the ability to pay you back with a guaranteed 100 cents on the dollar is the Federal Government, due to it's unique franchise ability to manufacture new "dollars" whenever it needs them. Of course, that very ability is what erodes the purchasing power of the currency received.