A Bird’s Eye View of the Global Financial System
The single biggest issue for the world today is that there is too much debt in the financial system.
Some eye-watering facts:
Globally, the debt-to-GDP ratio is 322%.
Amongst G-7 nations, the numbers are striking:
- United States: 106%
- Germany: 61%
- Japan: 196%
- The United Kingdom: 85%
- Canada: 89%
- France: 98%
The only debt-to-GDP ratio that looks remotely decent is Germany’s – and that’s because the country has been aggressively paying down its debt. During the 2008 crisis, Germany’s debt-to-GDP skyrocketed to 82% as its economy collapsed and it went on a debt binge.
Put another way, of the seven largest developed nations, only one of them has a debt-to-GDP below 85%… and that is very likely to change during its next major recession.
By the way, anyone who tells you China doesn’t have a debt problem doesn’t understand how that country accounts for its debt.
Remember, China is fundamentally a command economy – an economy in which production, investment, prices, and incomes are all determined by the government.
As such, the government owns most of the large companies in China, called state-owned enterprises (SOEs). China uses these to hide its debt loads…
Because SOEs are technically companies – not the government itself – China doesn’t have to report their debt loads in its official debt data.
POOF! Suddenly China’s official debt numbers are much lower! When in reality, its debt-to-GDP ratio is north of 100%.
Again, the world has too much debt. No major nation is an exception.
A Global Debt Crisis
Now, there are three ways to deal with excessive debt:
- Pay it off through growth or fiscal restraint.
- Attempt to inflate it away by debasing your currency.
Of these, the only viable option is #3.
This sounds like a complicated idea, but really, inflating the debt away means money printing.
Think of it this way: Let’s say you owe $1,000 in debt. Now imagine that the dollar loses 50% of its value.
You still owe $1,000 in debt, but because each unit of debt is worth so much less, your REAL cost of the debt is only $500 in today’s terms.
This is the only real option major nations have today. And it’s one that policymakers LOVE to use, as the COVID-19 pandemic has revealed.
Editor, Money & Crisis