Editor's pick: Originally published June 23.
The global economy is addicted to debt. And like an addict, it doesn't seem to care how its actions affect people around it.
Remember the underlying cause of the 2008/09 economic crisis? Too much debt. All the debt that individuals, banks, businesses, and governments took on almost caused the global economy to collapse. You would think that this crisis was enough to make an important point: Too much debt is bad.
But the lesson was apparently not learned. Total lending has risen by 40% and the world economy owes itself at least $57 trillion more than it did in 2007. Since the beginning of the new millennium, total debt has risen by $112 trillion. That's a 129% increase. (And this is data from 2014. One estimate suggests that another $30 trillion in debt was added in 2015.)
How much is $57,000,000,000,000?
It's difficult to really wrap your brain around a number this big. It's enough to give every man, woman and child on the planet about $7,700 each ($57 trillion/7.4 billion people). Or you could buy everyone:
- A New 15-inch MacBook Pro
- And a 128GB iPhone 6s Plus
- And a round-trip flight from New York City to Los Angeles in business class
- And $2,200 in spending money.
And this is just the new debt added from 2007 to 2014. The world's total debt is now more than $200 trillion.
Governments Are the Largest Borrowers
The pace of debt accumulation has been slowing, which could be considered good news. From 2000-2007, debt grew 7.2% each year. From 2007-2014, it grew 4.9% per year (compounded). But this isn't reason for celebration, because the base from which the numbers are calculated is growing.
Growth in household and bank debt has slowed down. But governments have more than picked up the slack. Of the $57 trillion of new debt since 2007, governments are responsible for 58% of it.
Global banking giant HSBC reported that governments are set to borrow even more this year -- more than any year since 2009. That year, governments borrowed and spent record levels of capital to deal with the financial crisis. But governments don't use savings accounts for new spending -- they use more debt.
$57 Trillion in Debt and Not Much to Show for It
So what has this huge amount of money done? Well, one reason for all the government spending and low interest rates (that make it easier to take on more debt) was to help avoid a repeat of the Great Depression. And it may have worked, especially in the years immediately following the global financial crisis. World GDP growth did recover in 2010, as shown below, and that may be because of "stimulus" spending, which resulted in taking on more debt.
But the problem is that since 2010, economic growth has been steadily declining, while debt continues to pile up. Each year, economic growth in relation to the amount borrowed is declining. Even at historically low interest rates, spending isn't enough to stimulate the global economy.
A big concern was that all this extra money being pumped into the economy would lead to inflation. After all, more money in the financial system often leads to higher prices. But this has not happened.
In fact, despite all the government spending and easy access to money, the bigger worry is deflation, or steadily falling prices.
No government or central bank wants to deal with deflation. When people think prices will be lower in the future, they'll hold off on buying things. So less money gets spent and economic growth slows even further. A deflationary spiral is very hard to escape.
To combat deflation, central banks have been encouraging more borrowing so people can buy more things and keep prices from falling. And governments have been borrowing more to spend to stimulate their economies and stave off deflation.
Has it worked? Here's a chart of the Consumer Price Index (CPI), a measure of global inflation.
The global economy averted disaster during the financial crisis. Prices fell but began increasing again in 2009. Since 2011, though, the CPI has been falling. It is now at 1.5% and if it goes any lower, global deflation could become a reality.
The bottom line is that all of the stimulus and borrowing has not done much. And the question is: How bad would it have gotten if all this money hadn't been spent?
What Might Happen Next?
- Debt levels continue to rise. There's no telling at what level they become too much. $50 trillion and $100 trillion were already ridiculously high. Now global debt is more than $200 trillion. With numbers this big, is there much difference between $200 trillion and $300 trillion?
- At some point, government debt will be too much. The whole monetary system is based on trust, and at some point some governments will no longer be trusted to pay the money back.
- Real, hard assets will increase in price. Precious metals, such as gold, hold their value and are viewed as a safe havens in times of financial distress.
Investors should be cautious of the growing debt burden. Pay attention to your stop-loss levels to limit losses if markets fall. And hedge against falling markets and currencies by owning some gold. One of the easiest ways to do this is to use through the SPDR Gold Trust (GLD) , and exchange-traded fund that's designed to track the value of gold.
Kim Iskyan is the founder of Truewealth Publishing, an independent investment research company based in Singapore. Click here to sign up to receive the Truewealth Asian Investment Daily in your inbox every day, for free.