How big a problem is the mounting global debt?

Pierre Aury assesses the state of the world economy with some startling stats.

We saw last month that it was unlikely that the historically high level of unrealised losses sitting in the balance sheets of banks could trigger a 2008 style crisis. Human ingenuity is endless when time comes to cook the books in order to avoid a crisis.Back in 2008 when most banks were bankrupt one of the first steps taken by the regulators was to ban short selling of shares of banks – a clear case of breaking the thermometer to hide the fever.

In this column we will look at the total indebtedness of the world and why it might be a problem for the world and therefore for shipping.

Simply put the world is buried under $315trn of debt and counting. This number is the number published by the Institute of International Finance (IIF) back in Q1 2024. The number was $307trn in Q4 2023 meaning a 2.6% increase in one quarter. This is 2.4 times world GDP and represents $41,000 of debt per living human being. This is huge but in itself doesn’t tell us how sustainable or not it is.

Global debt now stands at is 2.4 times world GDP

Some would argue that against this very high level of debt the world has accumulated a lot of assets and rightly so. The world’s net assets according to McKinsey stand at $610trn (actually that was in 2022). Global debt is only half of the world’s net assets so we are safe?

To be honest we have no idea but the problem is in fact different. The problem is that the total level of debt not only cannot decrease but can only increase simply because of the link between GDP and money supply and the way money supply is created. GDP is money supply multiplied by money velocity. Money velocity has been stuck at around one for a very long period of time so in fact GDP is equal to money supply. Money is created ex nihilo when private banks make loans and it is destroyed on the occasion of each principal repayment.

The problem is not that money is created ex nihilo because there is no other way to create money. The problem is that, in a total legal vacuum, private banks are creating money. As GDP is equal to money supply it implies that every unit of money repaid to a bank has to be immediately replaced by another unit of money created through a new loan failing which GDP is going down. So the overall level of debt cannot go down unless we want to see GDP dive. And because loans are extended against the payment of interests new loans have to be extended to create the money necessary to cover these interest payments.

Any politician claiming that she or he will make the overall level of debt in the system decrease is simply delusional.

Going back to the real world all these ever increasing loans are bloating more and more creditworthy balance sheets.

Creditworthiness is of course a matter of ratio, but we saw what they were worth back in 2008, and g we saw what happened again back in 2008 when trust disappeared overnight.

So here we are sitting on a mountain of ever increasing debt relying on trust not evaporating for whatever reason. This seems highly unstable. So by all means carry on torturing AIS data trying to make ever better trading decisions but keep an eye on the big picture please.