|Back in 2002, just after the ‘dotcom’ crash, global debt was $86 trillion. At the time, as the graphic shows, that equated to a massive 246% of world GDP.
Move forward five years to just before the Great Financial Panic and global debt had risen 73% to $149 trillion, an even more massive 276% of world economic output.
By 2012 the figures had grown to $205 trillion and 305% of the planet’s GDP. By the start of last year’s first quarter, we were looking at $217 trillion of global borrowing that equated to a staggering 327% of GDP. And by 2017’s third quarter, worldwide debt hit a record $233 trillion.
While the debt/GDP ratio has since dipped to only (!) 318%, largely due to the ongoing Chinese shadow banking crackdown that has curbed debt growth, this still suggests that the world’s debt per person has ratcheted up to more than $30,000.
Not exactly a comforting thought.
We’re all guilty…
And nor is the borrowing breakdown, as the next graphic shows.
Again, the percentages shown indicate debt/GDP levels for the constituent parts of the global debt/GDP ratios in 1997, 2007 and last year. Every sector is guilty of growing both its absolute indebtedness and also its proportion of economic output.
Britain’s borrowing situation isn’t great. Yet it’s by no means the worst. In particular, private non-financial sector debt has just hit all-time highs in Canada, France, Hong Kong, South Korea, Switzerland and Turkey.
This brings us back to those global debt/GDP ratios. Though there’s been a recent modest decline here, it may well prove to be temporary. If we’re near the peak of the economic cycle, slowing growth and ever-rising borrowing may soon drive the ratios higher once again to fresh all-time record levels.
The circle is clear. Lower interest rates/more debt have – for the moment – lifted economic growth and driven up global stock prices. Yet there must be a limit as to how much further both borrowing levels and debt/GDP ratios can rise.
In other words, the present situation is unsustainable. The world’s debt to itself cannot keep climbing. It has to be simply a matter of time before global credit growth grinds to a halt. In turn, this will crush economic expansion – and stock prices will be shattered as well.
Which is why, if you haven’t already, I would recommend reading former financial threat-analyst for the Pentagon, Jim Rickards’, latest book – The Road to Ruin. Inside, Jim highlights practical ways you can protect your wealth against a financial crash. If you’re interested, you can find out how to claim a free copy here.
To finish, higher inflation is likely to result in slightly higher interest rates. But the debt pile could prevent central banks raising rates as much as they’d like due to concerns about the debt servicing ability of both highly-indebted firms and also governments.
for The Daily Reckoning