Debt And The Economy
The massive debt load that is happening around the world is stifling the global economy. This is something that has been taking place the last few decades with no end in sight.
Many people have ideas about why this is the case. However, for the most part, they tend to miss the most basic element.
Debt is the same at every level. It really doesn't matter whether it is a government, corporation, or individual household. When they accumulate debt, the consequences are the same.
Of course, governments have a few different options in some situations, especially when it is the US Government. Since it is the reserve currency, there are something things it can do that other countries cannot. This allows it to keep operating long past the time when consequences would normally be felt. Whether this continues in the future is something we will have to watch.
The challenge with debt comes down to servicing it. As long as the payments can be made, things are not a problem. This is something that we all know. Have a mortgage and a car payment? No problem as long as the job is in place, bringing in the money needed to make the monthly bill.
From a government perspective, it is unlikely the US Government will default. Everyone else is not so lucky. Defaults take place and, actually, are natural. It is a clearing out process. This is one of the challenges we have right now with the insistence on keeping things "propped" up. It is deterring the natural cleansing mechanism that markets have. Hence why we have so many "zombie" corporations.
What ends up happening is that the cost to service debt keeps increasing as more is taken on. This starts to direct large sums of capital to what amounts to non-productive purposes.
Again, we can look at our personal income statements for this idea. As we take on more debt, say a car loan, if our incomes are the same, we have less money to spend elsewhere. At the personal level, productive spending can be termed "investing". So if we were investing $1,000 a month, then take on a $500 car payment, now our investment fund is only receiving $500. It was cut in half.
We can see how this will have a long term impact upon our finances.
From the standpoint of an economy, the situation gets that much worse. As more debt is taken on, the cost of servicing the debt keeps rising. There are times when certain actions can help offsetting it, like rolling debt over from a higher interest rate bond and replacing it with a lower interest rate.
Nevertheless, we find the governments of the world were amassing debt for so long that many of the bonds that are out now are very low. There really isn't much to be garnered with that tactic anymore.
Here we see, from an economic standpoint, that as the debt load grows, the amount to service the debt expands, leaving less money to put into productive purposes. This really gets difficult since the only way to offset this is with growth, which is stifled by the misallocation of capital in terms of productivity purposes.
Hence we see the downward spiral that took place across the planet for the past couple decades.
As we can see from this chart, the growth rate of the US Economy has slowed the last couple decades. Each one is a bit lower in terms of the higher points, meaning we just are not seeing the growth we need.
Ultimately, the cause of this is not enough money is heading into productive areas. Instead, we have larges sums being extorted from the economy in the form of unproductive payments. This is a big problem going forward. We see this situation only getting worse as more debt is added to the balance sheets of most major countries.
Therefore, the raw number really doesn't matter since these balances are not going to be paid back by governments. What is vital is the amount that is money that is going to service the huge numbers, something that is only growing.
This is why anemic growth is becoming the norm for the global economy. We see China even starting to be bogged down by what they did the last 10 years.
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