Last week the IIF Institute of International Finance released a widely followed report. It revealed that worldwide total debt has reached another all-time milestone of $247 trillion through the first quarter in 2018. The non-banking and finance segments made up $186 trillion of this eye-watering total.
This brought the debt to GDP ratio for the world to over 318 percent. It was also the first time such a quarterly rise occurred in two years, per the IIF. It happened at a point of all-time record highs in company and consumer debt for a number of the well-developed economies.
This debt level should be a serious concern for you (alongside the effects of the full-scale trade war and the tightening of the Fed’s monetary policy). One well-regarded analyst, the Chief Americas Economist Joseph LaVorgna of Natixis, warned that the corporate segment debt should be of greatest concern to investors. He stated in one of his research notes that:
“The corporate sector is highly leveraged and could be very vulnerable to higher interest rates. Firms have used artificially low rates to borrow in the capital markets and only buy back stock in the equity market. The inherent instability of debt over equity financing suggests that the next downturn could hit investment spending unusually hard.”
LaVorgna went on to expound on the reasons for this dilemma. Interest rates at historic lows have created this problem because of the quantitative easing policies of the government over the past decade. Looking at this chart, you get the idea of how bad the numbers have become for the global debt figure in the last 20 years:
It is ten years since the mid-summer of 2008 when the world stood on the brink of the most serious financial crisis since the time of the Great Depression. Back in 2008, the United States had a national GDP of $14.8 trillion. This amounted to the biggest on the planet by far at the time. The total Federal debt for the U.S. back then was $9.5 trillion, approximately 64 percent of the country’s GDP.
Now back to our time today, the numbers have shifted dramatically (and not for the better). The GDP of America has increased by 35 percent to approximately $19.9 trillion. In the same amount of time, the country’s debt has rocketed higher 122 percent to reach in excess of $21 trillion.
This brings us to a debt to gross domestic product ratio of a staggering 106 percent. It represents a significant point because the country’s debt is officially bigger than the whole American economy today.
It is not over either. The national debt continues to rapidly expand. The CBO Congressional Budget Office anticipates a full $1 trillion more per year through 2028 at least will be added to the total national debt.
Another way of looking at this is that in the last ten years running from 2008 to 2018, the American government increased the debt by $11.6 trillion. This was above and beyond what they already had borrowed in the past. It would make some sense if the economy had expanded by $11.6 trillion in extra output economically.
What happened instead was that the American economy only increased in size by $5.1 trillion. This means that for each one dollar the government chose to borrow, a mere 44 cents worth of economic output became created. Logic would dictate that one dollar in debt would create at least a dollar in additional GDP levels.
Instead, the government wasted the money on entitlements primarily. Sadly, in the early years of the new century, you could barely find any investments left in the national budget that pertained to productivity or infrastructure. This was not the case back in the country’s glory days of the 1950’s when the majority of the federal budget went to infrastructure and other productivity improvements.
Only 29 percent of the whole budget was directed to mandatory entitlements in those days. Today the figure is over 60 percent of the entire American federal budget.
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