The BIS announced that global debt has exceeded $100 trillion. This is up 40% since 2007 from $70 trillion back then. To put this number in perspective, it amounts to roughly 6 times the size of the U.S. economy. Do you find this odd? Odd that 6 U.S. economies have been “added” to the global system yet business still cannot get any traction so to speak? Please understand that while writing this piece I will not add in the $1.4 quadrillion (with a capital Q) of derivatives which is how all of this debt (and everything else) actually gets levered. The “debt” itself (and currencies) are the original Ponzi scheme. Derivatives are used to “juice” the Ponzi, prolong its life and hide any loose ends that show evidence of the financial system being a Ponzi on top of a Ponzi on top of a Ponzi…and so forth.
My initial thought is that the entire world is now spinning with a debt to GDP ratio of 100% or more, which, if history is any guide at all, is the level where “unpayable” becomes the description. The BIS also said that the world’s equity markets actually shrunk by $3 trillion during this time to $54 trillion over this timeframe. This is also an oddity because the newly piled on debt has not created additional equity either. Why would this be? In the past, if you increased systemic debt you would always see an increase in economic activity which should flow through and eventually create more equity. This has not happened, economic activity nor equity has grown since 2007.
I have an explanation for this that the Keynesian economists will not like, but it is the truth. I even wrote about this “phenomena” in late 2007. It is called “debt saturation.” Debt saturation is the level where adding more debt does not increase economic activity and the law of “diminishing returns” sets in. Debt saturation is the point in time where there are no more potential debtors left because they either cannot or do not want to go further into hoc. It is the level where $1 of new debt creates LESS than $1 of new activity.
Here we are 6-7 years later and it still has not really dawned on our “bus drivers” that this is the case. Maybe they won’t “get it” until the law of “negative returns” takes over? Actually they do get it but have no other choices. This is the point in time where adding $1 of new debt actually decreases economic activity. Theoretically possible but I don’t think probable in the real world as markets will blow up prior to or simultaneous with this point in time.
Let’s however look at this increase in debt from a different angle. One man’s debit is another man’s credit. Or more to the point, “One man’s liability is another man’s asset,” and herein is the problem. All of this additional “debt” has somewhere, somehow become an “asset” – an asset as in a bond that is owned and on the books of someone or some institution and represents “value.” Some of the debt is being carried to “fund” things like your retirement plan at work or in the Social Security “lock box.” Some of the debt was used to purchase real estate which you “count” as part of your net worth. This one needs a little explaining. You just saw your neighbor sell his house down the street for X amount of dollars so your house must be “worth” X amount of dollars also, right? Some of this debt went to buy cars (a depreciating asset) while other debt went to pay for college educations or even used to just maintain lifestyles. The problem with this is that your house isn’t really worth what you think it is and your lifestyle, while pretty cool right now, isn’t really worth as much and will not last once the credit valves gets shut off.
The greatest majority of increased debt however was used by governments to “roll over” and pay off past debt and yes, the BULK of this debt went into the banking system to “save” it. You see, much of the “too much debt” became bad debt in 2007 and 2008. Some of it was liquidated but much of it was not and now resides “inside” of the central banks. The banking system offloaded much of this old, bad debt and replaced it with “new, good debt” – or at least this is/was the theory.
I have said all along that no matter what the central banks thought, they could not make “bad debt good” and that the problem was not one of liquidity, it was one of solvency. The bad debt is still bad, however it now resides in a different place. The bad debt now resides in the deep, dark and secret shadows of central bank balance sheets where it doesn’t trade, is not “valued” at anything other than par and may not even be close to current on payments… but who cares? Who’s the wiser? This is a problem, a very big problem…but not until it “becomes one.” I say this because not only have the various sovereign treasuries bankrupted themselves, their central banks have also… we just haven’t been told yet. By keeping this bad debt “hidden” and in the shadows of central bank balance sheets it does not get “valued” with any type of real market price. The central banks are lying to us and to themselves as to what “value” truly is. They must by definition do this, otherwise confidence breaks and the game ends.
So what did this explosion in debt “buy” us? In the case of the Chinese it bought them infrastructure, new cities, stockpiles of raw materials and “deals” for raw materials. In the case of the West, it bought us time. Time to stay “on top.” Time to continue our charade. Time to put laws in place to make anything they do “legal” in response to the unrest that will surely come when reality arrives. This explosion in debt has only made the ratios that much worse. It has only made the weight of shouldering the debt that much heavier. It has also made the final chapter that much uglier. In plain English, the “grand experiment” of going all in did not work and only made a bad situation 40% worse than it already was.
I see no possible way that what comes our way can be explained away to the common guy in the street. When bank balances get bailed in and pension plans cut by 50% or more how do you explain this to someone who worked, saved and “played by the rules” their whole life?
There are in my opinion only 2 options and both include war.
Option A is some sort of VERY big “false flag” event followed by war.
Option B is skip the pretenses altogether and just go straight to war.
Mark my words, Joe and Jane Smith can only be made to forget their “losses” if they fear for their lives. Call me nuts or conspiratorial. I would suggest that reading history shows that when governments become desperate they always revert to options A or B. Do you really expect them to tell you flat out, “Tough luck. It was all a fraud and we stole your money…what are you going to do about it?” Fat chance!