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A Global Addiction To Debt With The West Leading The Pack

300px-Usa_national_debt_20_April_2012Global debt is now at 286% of GDP (Gross Domestic Product). Although debt like investment serves a purpose in the development of an economy, beyond a certain level it brings diminishing returns. The Bank for International Settlements an organization that has within its membership the world’s central banks, has calculated the threshold where debt becomes destructive. It is 85% of GDP in household debt and 90% for non-financial corporate debt. Most wealthy nations have gone beyond these benchmarks. This portends a troubling future, where debt will take an ever greater share of the productive capacity of the economy.

As the debt has become excessive in the advanced world, most of it is not being used to finance new productive assets like transportation facilities, communication upgrades or manufacturing plants, but rather a change in the ownership of assets already in existence. The financial industry that develops in the reassigning of this wealth, ends up becoming a drain on the larger economy.

Public Debt As A Percent Of GDP (2010).

Public Debt As A Percent Of GDP (2010).

Increasing debt therefore prevents the creation of new growth, as an ever greater share of the national wealth is spent on repaying previous obligations. This leaves far less resources available to invest in making new productive assets.

An increasing problem as indebtedness takes hold of an economy is the increasing instability that results. Defaults and bankruptcies become far more likely in troubled times. It puts an additional strain on the financial health of an economy, as foreclosures put banks and other institutions at greater risk of insolvency. If there is a big enough downturn in the economy, it can create financial panic and bank failures.

The wealthy countries of the world actually encourage the accumulation of debt through tax policies. There are across many countries deductions in tax liability, for interest paid on accrued indebtedness. Tax breaks for various kinds of debt have become intrenched in so many of the economies of the Western world, that it is now deemed as the fairest way to compute a tax obligation. The shortfall that this creates requires a higher rate of taxation overall, to make up for these numerous interest deductions.

Public Debt As A Percent Of GDP, Evolution For USA, Japan And The Main EU Economies.

Public Debt As A Percent Of GDP, Evolution For USA, Japan And The Main EU Economies.

In many countries in Europe for example, more money is spent on subsidizing debt than on national defense. In the United States the value of real estate equates to more than 10% in tax benefits for borrowers and is worth 1% of GDP. In the Netherlands the rate is double that, estimated to be close to 2%. The mortgage interest tax deduction exists in various levels across Europe including larger nations like Italy and Spain as well as smaller countries like Belgium, Denmark, Finland, Norway, Sweden and Switzerland.

There are dire consequences in the rapid accumulation of debt by the consumer, the corporations and the government itself. The tax policy on debt did not cause the financial meltdown that occurred in 2008 and 2009, but it did make it worse. The crisis itself was after all, precipitated by a collapse in the housing mortgage industry that began in the United States and soon spread to Europe and later Asia. This occurred with astonishing speed because a great deal of this debt was bundled together in what became known as toxic assets, because so many of them were non performing.

The business world contributed to the crisis, by heavy borrowing to achieve leveraged buyouts and mergers along with commercial real estate. This was all possible by the large buildup in debt and the accompanying tax policy. It ended with heavy losses that were often picked up by the taxpayer, since many of these large corporations were considered too important to the general economy to allow them to fail.

GDP Increase, 1990–1998 And 1990–2006, In Major Countries.

GDP Increase, 1990–1998 And 1990–2006, In Major Countries.

Banks were the worst offenders in taking advantage of the tax laws and weak regulations, that allowed them to sell securities that were counted as assets.  In the end, they were no where near their assigned valuation. In reality they were debt instruments, that gullible regulators allowed the banks to count as capital.

Right before the collapse, nearly one third of the supposed capital of the banks were made up of these securities. The financial crisis that followed has still not really been dealt with, despite the huge government bailouts in many cases. The global banks collectively are estimated to have lost a total of $2 trillion USD (United States Dollar).

In the last 7 years alone, debt accumulation in relation to GDP outside the financial sector, has risen in 41 out of the 47 largest economies in the world. There has been an overall surge in debt since the beginning of the 21st century.

Interest Burden Of Public Debt With Respect To GDP

Interest Burden Of Public Debt With Respect To GDP

Interest rates near or at zero and in some cases below zero have only compounded the problem. It has encouraged even more debt across the board. It encourages individuals and companies to take even greater risks when it comes to investments. The same is true with quantitative easing which simply injects additional liquidity into the economy and encourages even more reckless behavior with debt.

Lastly, governments themselves continue to rack up ever higher levels of debt with some notable exceptions like Germany. The Germans actually balanced their federal budget this year. Although in the European Union (EU) there is an ongoing effort in reducing the annual federal budget deficits to under 3%. A number of nations particularly France, are having a difficult time in achieving this (EU) financial rule.

The United States passed a milestone in 2013, when government debt exceeded GDP for the first time. In Canada at the end of 2014, the debt level was at 89.10%. The Euro Area as a whole is at 91.90%. Individually the situation is more dire. Although Germany is only at 74.70% and the Netherlands is at 68.80%, France is at 95%. Spain is higher at 97.70% and Italy is at a whopping 132.10%. The United Kingdom outside the common currency zone is at 89.40%. Switzerland comes in with a low 35.40%. The worst case is Japan, which is now at an incredible 227.20% of government debt in relation to GDP.

World Share Of GDP (PPP) (World Bank, 2011)

World Share Of GDP (PPP) (World Bank, 2011)

Emerging nations have much lower rates of government debt in relation to their GDP. Brazil is at 58.91% and India comes in at 67.72%. Then you have nations like Indonesia with 26.11%, Mexico at 36.90% and Turkey with 33%. If you can believe the figures, China comes in at 22.40%.

It is only when you add the total debt of a nation that the figures runs several times above the GDP of individual countries. When you compile government debt with household debt along with corporate and financial debt emerging nations are still below 200% of GDP. Advanced economies are well beyond 300%.

When one looks at debt levels, the situation is much worse then one might think. This is because it does not include future liabilities, which are far greater than total debt levels of most countries in the Western world. Yet in most advanced countries the spending and borrowing continue apace. When interest rates eventually return to more historic levels, many countries will be facing bankruptcy of one kind or another.


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