Encouraged and asked by Katharine I have put together a summation of the current situation with debt. In short, the world is floating in debt, possibly soon drowning in debt, developed and developing countries alike. Central Banks around the world have been giving out near free money over the past decade. Corporations that have access to all this cheap money have used it to buy their competitors, repurchase their stock and pay eight and nine figures to their C team.
As far as the US federal debt. Its now over $20.6 million. That's $20,600,000,000,000. Just ten years ago it was half that but now with mostly weak economic activity during this decade long period. Remember not all Gross Domestic Product has a positive impact on the economy and/or society. Today the debt to GDP is about 105%, approaching a dangerous level. Our highest percentage was just under 119% at the end of World War 2 but a robust economy afterwards brought that down to under 60%.
We issue debt just to pay the interest on the current debt. We haven't applied a penny towards principle in at least half a century. We have come to monetize the debt, or simply print money to cover the new debt. The Treasury hits a button and billions instantly appear in the accounts of the Federal Reserve. The Fed in turn takes that money and buys new issues of our debt. Since the US maintains its own currency it can make money appear out of thin air. However, nations that have tried this in past haven't fared so well. Since there's so much of it being printed the currency loses value. In our case all that made up money isn't really hitting the general economy. One reason the big banks and Wall Street are doing so well but not consumers (I'll talk about the banks later).
Yet the US isn't in as bad shape as other countries. China is at approximately 250% as the country has put displaced manufacturing workers to work on public works projects. In addition, more and more rural inhabitants are showing up in the major cities expecting a better paying job than the farm. China already suffers from too many males and not enough female partners due to its previous one child policy. Got to keep all those horny young men busy or they might just revolt.
Japan also comes in at around 250%. An aged population means there isn't enough younger workers to support all the old retired people demanding a litany of services. Greece is at just under 180% while France looks much better at 85%. The Brits are at 90%. All mentioned had much lower percentages just a decade ago.
In the US states and municipalities cannot run deficits. However, that has not stopped them from using accounting gimmicks and other financial wizardry to fill the gapping holes.
Finally, US citizens have followed the lead of their government. Consumer debt of every type increases every minute of every day with never a second of decline. As of today, mortgage debt is at just under $15 trillion, student loan debt at over $1.5 trillion, credit card debt at more than $1 trillion with another $571 billion in other types consumer debt. Consumer debt has risen 141% over the past ten years or so and has been the primary driver of consumer spending since the 1980s. Prior to that most Americans only financed large ticket items. A typical car loan was three years, today its approaching seven years.
Mortgage debt is growing the slowest as there has been a decline in first time home buyers.
You might think bankers and lenders are quite worried about the trajectory of consumer debt. In fact after the Great Depression bankers were painstakingly careful about making bad loans. In the 1980s and 1990s all that began to change. Securitization meant bankers could bundle like loans into a security and sell it off to investors for a hefty fee. The investor gets an income stream from the repayment of principle and interest but usually assumes the risk of loss. Investors depend upon one or more of the three rating agencies to tell them how good the loans are within a portfolio. However, the rating agencies do not have the capacity, resources and knowledge to understand what might be within those securities. But since the money's good they rate it anyway.
Investors might be dumb but they sure aren't are stupid. By 2006 with mortgage losses soaring they stopped buying the crap being sold to them blessed with the highest of credit rating. The bankers not ready to give up on the massive fees envisioned Plan A. Under Plan A the bankers would continue to originate garbage loans and hide them away from their own shareholders and regulators through off balance sheet arrangements. Its as if those loans didn't exist. The belief was that the investors would soon come around again and beg for more.
Plan B assumed at worst the Treasury would hand them a bail out and more importantly the Federal Reserve would buy off all those junk loans for stated not market value. Plan A didn't work out so good but Plan B worked like a charm.
So where is all this going? Unless Trump's tax plans really ups the ante on real economic activity and living wage jobs we could be back to adding another trillion plus to the debt. At the end of the Obama era the deficit was just under $600 billion a year, down considerably from the $1.8 trillion in 2009.
As long as the US can print money without loss of value of currency, or known as inflation, and maintains status as world's currency the game can continue. No empire has ever been able to continually build debt and the US is trying to be the first.
As long as investors continue to buy collateral debt obligations (various types of consumer lending loans) and default rates don't roll off the charts Americans will continue to live on plastic and afford cars by repaying for them over years and years. As 2008 exhibited even when a small amount of loans go into default all hell breaks lose.
The last part of debt is derivatives. Derivatives are simply an insurance policy against losses, in this case the loss when borrowers do not repay loans. Derivatives are unregulated and do not require insurers to hold a "reserve" against future losses. The insurers can handle small numbers of losses from their cash flow. However, when we get into a situation like 2008 there again won't be enough to pay off lenders and investors that insured against credit losses. Last time Uncle Sam (or really you) made all those insurance claims whole. Currently there is approximately $1 quadrillion (that's $1,000,000,000,000,000) in outstanding derivatives. If just 15% go bad that would be $150 trillion needed to pony up for losses. The bail out of 2008 and 2009 in total was around $14 trillion so you get the picture.
If all of this looks like one big crash coming you would be right. Debt only works when it gets repaid. What kind of event we are looking at one day in the future at this point is unconceivable. And it will be a total global fail. Some of the mega super rich have bought and developed islands. They will simply go off to their island with enough staff to harvest and maintain the island. These mega rich won't be enjoying a lavish jet set lifestyle but they will be quite comfortable. The rest of the world won't fare so much. Not to mention the chaos might lead to world war, this time the major powers having nuclear weapons.
There is a condensed version and there is more too it, particularly as it comes to our debt based monetary system. More to the point since the Federal Reserve was created the dollar has lost 95% of its purchasing power, and on purpose. The gap has been debt and debt is profitable to the bankers, particularly when they have a backstop from you and me.