The danger of excessive global debt / by kevin murray

According to Institute of International Finance,, "The global debt-to-GDP ratio exceeded 318 percent in the third quarter of last year (2018)." This debt is made up of governmental debt, non-financial corporate debt, household debt, and financial sector debt, of which, the debt-to-GDP ratio at 318 percent is only slightly below the previous record of 320 percent as recorded in the third quarter of 2016. 


The most basic thing to recognize about debt is that debt is created by those borrowing money; of which, that money so borrowed plus the interest associated with that loan as well as any assorted penalties are due to the loaner of that money, all of which, must ultimately be paid back.  At least, that is the general theory of debt and the payback of debt, but in many respects, there are probably trillions of dollars of debt, that will for all intents and purposes, never be paid back.  Further, there are trillions of dollars of debt, that will continued to be rescheduled, reconfigured, and rearranged, till time itself ends, because the debtor functionally cannot really pay back the debt, and the originator of that loan, functionally cannot afford to recognize that debt as being lost.


So too, for all those that contemplate if and when, interest rates will normalize to the rates that the cost of loaning money has historically been pegged at in the modern era, are certainly beginning to recognize that those interest rates will probably not normalize anytime soon, because those that are indebted can't even pay back their loans at these historic low interest rates, because they cannot in aggregate realistically service those loans.


Additionally, the fact that companies that borrow money, have to pay that money back and service that debt, or at least service as much of that debt as they can in order to appear current, signifies that some portion of the monies that might have been allocated for equipment, infrastructure, or labor has to instead be utilized to pay back the loaner of that money.  This would indicate that the more debt that is taken on in total, the slower pace the global GDP growth will be, not only because the accumulated debt has to be paid back in some scheduled way, but because the sheer size of the debt so generated is dwarfing the amount of GDP created from all that money so loaned.


The global financial system is able to maintain its stability, not so much because it is stable, but rather because any meaningful instability of the current global financial system, could and probably would result in a global financial catastrophe.  Yet, there does not appear to be any viable solution to the phenomenal debt overhang that poses as something akin to the sword of Damocles, even though all of the major players are cognizant that something constructive needs to be done.  For the time being, the players keep playing, and the dancers keep dancing, but there is going to come a time when the music will stop and the chairs will be short, of which, there will still be some winners, but there will also be a whole lot of losers, and for a certainty there will be plenty of blood on the global streets.