NEVER BEFORE has the world economy been so indebted. The stock of global debt has gone from $83trn in 2000 to around $295trn in 2021—a rate nearly double the pace of world GDP growth. Debt rose from 230% of GDP in 2000 to 320% on the eve of the pandemic, before covid-19 propelled it to the even greater height of 355% last year.
Part of the reason for this explosion has been the steady decline in borrowing costs over the past two decades.
As a result, even though global debt has rocketed over the years, the world’s interest costs, as a share of GDP, are well below their peak in the 1980s.
All this could soon change. The era of super-cheap money is ending. Central banks are battling a surge in inflation.
The scale of the global interest bill is vast. The Economist estimates that households, companies, financial firms and governments worldwide paid around $10.5trn in interest costs in 2021, equivalent to 12% of GDP.
To illustrate the potential scale of the increase, we consider a scenario where the interest rates faced by firms, households and governments rise by a percentage point over the next three years.
In such a scenario, the interest bill would exceed $16trn by 2026, equivalent to 15% of projected GDP in that year. And if rates were to rise twice as quickly, say because inflation persists and forces central banks to take drastic action, the interest bill could rise to about $20trn by 2026, nearly a fifth of GDP.
This percentage increase is a very likely development. The inevitable result will be a domino of crashes – beginning with the most indebted countries and companies.
Economists William Rhodes and John Lipsky, who lead the Sovereign Debt Working Group at the Bretton Woods Committee—a semi-official US economic think tank—wrote in the Wall Street Journal this week about growing “challenges” in the sovereign debt market as well.
“The warning signs of a crisis are already clear,” they stated. “According to International Monetary Fund figures, interest payments on public debt as a percentage of public revenues are four times as high in low-income countries as in advanced economies, while the same ratio in emerging economies is twice as high.”
A decade ago this ratio was similar across all countries, but today, according to the World Bank, some “60 percent of low-income countries are either suffering from debt distress or at high risk of doing so.”
The day of reckoning has been postponed again and again by the US Federal Reserve and its allied central banks around the world since the crisis of 2008. The debt and money creation machine kept pumping and pumping.
Current high levels of inflation worldwide mean that this must end. Inflation is now averaging 7% across the globe. This is entirely a central bank-created problem. This is not something to do with Covid-induced supply problems. Inflation hurts working people by reducing real wages unless we fight very hard to keep up.
However, inflation is also a process whereby debt is being radically reduced in value. The 1% ruling elite rely on their ownership and control of debt to enrich themselves fabulously. They will not allow inflation to continue to reduce its real value. But their only tool to kill inflation is to reduce the money supply by reducing the credit available (a reverse quantitative easing) and increasing interest rates.
Keynesian economists don’t understand this. They mistakenly see inflation as a cost-plus problem and blame inflation on wage increases or oil price rises similarly to how they did in the 1970s. They were wrong then and the US dollar suffered a radical devaluation against gold that threatened hyperinflation before control was restored by what was dubbed the Volker Shock in 1979 – a US Fed interest rate of 20%. Mortgage rates and other debt rates followed. Multiyear US recessions and economic contractions around the world followed as did an explosion in the Third World debt crisis given that all debts were denominated in US dollars.
Today in the U.S. we are in the fourth superbubble of the last hundred years.
Previous equity superbubbles had a series of distinct features that individually are rare and collectively are unique to these events. In each case, these shared characteristics have already occurred in this cycle.
The penultimate feature of these superbubbles was an acceleration in the rate of price advance to two or three times the average speed of the full bull market. In this cycle, the acceleration occurred in 2020 and ended in February 2021, during which time the NASDAQ rose 58% measured from the end of 2019 (and an astonishing 105% from the Covid-19 low!).
The final feature of the great superbubbles has been a sustained narrowing of the market and unique underperformance of speculative stocks, many of which fall as the blue chip market rises. This occurred in 1929, in 2000, and it is occurring now. A plausible reason for this effect would be that experienced professionals who know that the market is dangerously overpriced yet feel for commercial reasons they must keep dancing prefer at least to dance off the cliff with safer stocks. This is why at the end of the great bubbles it seems as if the confidence termites attack the most speculative and vulnerable first and work their way up, sometimes quite slowly, to the blue chips.
The most important and hardest to define quality of a late-stage bubble is in the touchy-feely characteristic of crazy investor behavior. But in the last two and a half years there can surely be no doubt that we have seen crazy investor behavior in spades – more even than in 2000 – especially in meme stocks and in EV-related stocks, in cryptocurrencies, and in NFTs.
This checklist for a superbubble running through its phases is now complete and the wild rumpus can begin at any time.
The wild swings of the value of tech stock on Wall Street last week are a portent of what is to come and was highlighted by the Facebook parent company Meta losing 26.4% in value in a single day, equal to $230 billion, the biggest value loss by a company in history.
Unfortunately for the working class, we have no stake in either monetary theory used to maintain capitalism. We must go beyond trying to fix a broken system. We need to take the economic power being kept in the hands of the 1% out of their hands. That means making all money and its creation a public service. That means the banks, pension funds, insurance companies have to be nationalised and placed under democratic control and planning. The 1% have to be expropriated and the economy made to meet human needs and not be forced to only serve private profit and greed.