World Swimming Naked In A Tide Of Debt: Major Debt Restructuring Now Inevitable

The results of the central bankers’ great experiment with money printing are now in, and they are fairly depressing, as the charts below confirm:

The original article has been edited here for length (…) and clarity ([ ]) to provide a fast & easy read
  • On the left are the IMF’s annual forecasts from 2010 – 2018 (dotted lines) and the actual result (black)
  • Until recently, the Fund was convinced the world would soon see 5% GDP growth, or at least 4% growth
  • The actual outcome has been a steady decline until 2017 and this month’s forecast sees slowing growth by 2020

As the IMF headlined last week, “current favorable growth rates will not last”.

  • On the right, is the amount of money the bankers have spent on money printing to achieve this result
  • China, the US, Japan, the Eurozone and the Bank of England printed over $30tn between 2009-2017
  • So far, only China – which did 2/3rds of the printing, has admitted its mistake, and changed the policy

The chart above shows what happens if you spend a lot of money without getting much return in terms of growth.  Again from the IMF, it shows that total global debt has risen to $164 trillion. This is more than twice the size of global GDP – 225%, to be exact, based on latest 2016 data.  The IMF analysis also highlights the result of the money printing: “Debt-to-GDP ratios in advanced economies are at levels not seen since World War II….In the last ten years, emerging market economies have been responsible for most of the increase. China alone contributed 43% to the increase in global debt since 2007. In contrast, the contribution from low income developing countries is barely noticeable.”

…It doesn’t take a rocket scientist to work out the result of this failed policy, which is shown in the above IMF charts:

  • Global debt to GDP levels are higher than in 2008 and in the financial crisis; only World War 2 was higher
  • Debt ratios in the advanced economies are at their highest since the 1980’s debt crisis
  • Emerging market ratios are lower (apart from China), but this is because of debt forgiveness at the Millennium

Can all this debt ever be repaid?

As everyone knows, borrowing is easy

Almost all governments and commentators have lined up since 2009 to support the money-printing policy but the hard bit happens now as it starts to become obvious that the policy has failed. We now have all the debt, but we don’t have the growth that would enable it to be paid off…

Demographics drive the economy, not monetary policy

Common sense tells us that young populations create a demographic dividend as their spending grows with their incomes but today’s aging Western populations have a demographic deficit: older people already own most of what they need and their incomes decline as they enter retirement…

Financial markets are doing their best to warn us that the problems are growing

  • Longer-term interest rates, which are not controlled by the central banks, have been rising for some time. They are telling us that some investors are no longer simply chasing yield. They are instead worrying about risk – and whether their loan will actually be repaid.

Essentially, we are now in the end-game for stimulus policies. Major debt restructuring is now inevitable…

Swimming naked in the tide of debt

Leverage makes people appear to be geniuses on the way up but, on the way down, Warren Buffett’s famous warning is worth remembering: “Only when the tide goes out do you discover who’s been swimming naked.

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