It would take you 7,100,000 years to repay the global ‘debt crisis’ if you donated $1 every second – what’s the real solution?
The world is $246.5tn (£192tn) in debt.
If I donated $1 every second, it would take over 7,100,000 years to repay it. To pay it back by the year 4000, I’d need to give around $230,000-a-second.
And that wouldn’t account for any interest accrued.
The complicated thing comes with working out who I would actually have to pay (more on that later) but the numbers are so staggeringly large that they don’t mean anything to most people.
Once numbers go over a billion, most people tend to stop listening as they don’t have any use in the real world.
Safe to say, the debt is close to all-time records by any measure.
What does this mean in practice and what happens to all that debt? How and why has this happened? And what does the future hold after the impending ‘debt crisis’?
‘Global debt levels have been rising for decades, ever since the 1980s,’ Dr Jerome Roos, author and LSE fellow in International Political Economy, tells Metro.co.uk.
‘That’s largely because of underlying structural problems in the world economy. Growth and profit rates in the industrial sector stagnated in the 1970s.
‘In response, the US and UK governments, followed by others, decided to liberalise and deregulate the financial sector.
‘This increased credit availability allowed governments, firms and households to compensate for stagnating tax income, profits and wages by borrowing more.
‘The result was to artificially and temporarily restore the profitability of capital by incentivising firms to shift investments into financial activities as opposed to productive activities.’
This was combined with the privatisation of public services (education, health, housing etc), making them more expensive while real-wages remained flat.
Historically, sovereign (nation-state) debt is around paying for war and military action. But peace-time debt has become the new normal:
‘Now you need to get a mortgage to find a place to live, or a student loan to be able to go to university, or a car loan just to get to work,’ Dr Roos says.
That version of debt feels a lot more familiar to people.
But this trillion-dollar global debt figure works out as $86,000-per-capita (£67,000) globally, more than 2.5x the average income, according to the International Monetary Fund (IMF).
Metro.co.uk’s debt month is thoroughly investigating personal debt but what about the global issue?
With 60 countries at risk of debt distress, what happens if all this debt can’t be repaid and nearly a third of the world’s countries go bankrupt?
‘Historically countries used to go bankrupt all the time,’ Dr Roos says.
‘There is no formal international bankruptcy regime though, so we have a different term for this: when a government doesn’t repay its debts in full or on time, we call it a sovereign default.
‘Most “developed” countries stopped defaulting on their debts earlier in history, but throughout the 19th century, sovereign defaults remained quite common in less developed parts of the world, especially in Latin America and the Mediterranean region.
‘Most countries did their best to repay during the good times, but it was commonly understood that in times of crisis governments might have no other option but to suspend payments.
‘In the 1930s the vast majority of Latin American countries and a large share of European countries simply declared a unilateral moratorium on their debt service and stopped paying.’
In more recent times, only Argentina in 2001 suspended payments.
If everything is more stable, then what’s the problem?
‘You can have debt levels remaining high for a long period,’ Nicola Mai, executive vice president of investment managers Pimco, tells Metro.co.uk.
‘Part of the problem is that you end up with an economy that is burdened with high debt and that tends to lead to slow growth and a zombified economy for a long time.
‘The incentives to spend and to invest are lower because of these elevated debt levels.
‘Eventually, there are risks that if the debt levels become excessively high you could have financial crises on the back of that.’
Mr Mai is keen to point out that it would be too soon to panic now.
But trying to unpick where the debt actually resides is difficult. Sovereign debt is a strange circle:
It’s twice as big as the World Bank and the International Monetary Fund combined but still has outstanding loans with the World Bank itself.
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China has loaned money to Iran, Sri Lanka, Venezuela, Zimbabwe and a number of others and has been accused of laying a ‘debt trap’ to take assets from countries unable to service the debt.
China has recently taken control of a Sri Lankan port because of outstanding payments, which is a whole different story altogether about international diplomacy.
But China is not alone. France owes Germany and the UK money, the UK owes France and Germany money and Germany owes the UK and France money.
The same pattern is repeated throughout international markets, increasing with the globalised economy.
This debt cycle is incredibly complicated but bringing lending and debt down – or deleveraging – became a huge talking point after the 2007/2008 financial crisis the global economy is still arguably recovering from.
Too much debt caused the crisis so deleveraging must take place, it is argued, to make sure it doesn’t happen again.
Global debt increased by 50% over the next decade.
How can countries and big business get the debt down?
‘There are a few ways to do it,’ says Nicola Mai.
- Financial repression essentially keeping interest rates at a very low level
- Increase growth in the economy which helps the debt to GDP ratios to decline
- Create more inflation which again increases nominal GDP relative to that.
- Public sector austerity
- Offer high saving rates that help to reduce the debt
‘Going through the options, defaults can be very painful because you could have deep recessions.
‘We also know that austerity and high savings can be difficult to stomach for the economy especially when growth is already weak.
‘Ultimately what you end up with is a situation in which you keep interest rates at a very low level and you try to deleverage that way.’
That becomes a lot more difficult if the economic outlook slows, as current forecasts predict.
‘We are heading towards another major financial crisis, this one possibly even bigger and more destructive than the last one,’ Dr Roos says.
This article is part of a month-long focus in November all about debt.
Scary word, we know, but we're hoping if we tackle this head on we'll be able to reduce the shame around money struggles and help everyone improve their understanding of their finances.
Throughout November we'll be publishing first-person accounts of debt, features, advice, and explainers. You can read everything from the month on the Debt Month tag.
If you have a story to share, a topic you want us to cover, or a question that needs answering, get in touch at MetroLifestyleTeam@Metro.co.uk.
If these economic and debt crises combine, the impact is hard to predict.
But with all these incredibly opaque arrangements and never-ending global who-owes-who-what discussions, is there any way that we could just draw a line under it and start again?
‘We first need to know who is in debt and to whom,’ Dr Roos says.
‘If you take Greece, you see that the majority of its debt is held by EU institutions, including the European Central Bank, and the other EU countries.
‘Part of this debt could be cancelled at the stroke of a pen, just as the Allies (including war-ravaged Greece) agreed to forgive part of Germany’s debts after World War II.
‘Or heavily indebted students… there is an easy solution to the student debt crisis: just lower or scrap tuition fees and cancel some of the debt. It’s really quite easy to do in practice.
‘It just runs into a host of political problems because certain groups and institutions fiercely oppose debt cancellation for reasons of ideology and self-interest.
‘The creditors themselves will always take a hit in any debt cancellation, so they are bound to be opposed.
‘If they are politically powerful, that can block any effort at debt cancellation and that’s effectively why we have so little of it. But there are also deep-seated moral narratives around the issue of debt that muddy the waters.
‘In German, the word for debt is Schuld, which means both debt and guilt. Here we see how the debtor is always already considered to be at least partly guilty for their own predicament.
‘So to get to meaningful debt cancellation you have to break down both the moral force and the political power that preserves the interests and ideology of the creditor class.’
If only it was as simple as simply asking the lenders to let people off the debt.
‘At a structural level, the problem is even more complex,’ Dr Roos says.
‘If you really want to cancel all debts everywhere, the entire system would collapse.
‘Capitalism as we know it simply depends on continued credit circulation, the other side of the coin of debt accumulation. Finance thrives on it.
‘So if you want to deal with excessive debt, and the social consequences for ordinary people around the world, you have to think about redesigning our economic system to work in a completely different way to reduce our collective dependence on credit and to control the provision of credit more generally.’
Not quite as simple as just ‘spending less money’ then.
But don’t worry, if we start our $1-a-second Direct Debit now, it’ll all be over in 7.1m years.
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