
$250 Trillion in Debt: The World’s Post-Lehman Legacy - rayvy
https://www.bloomberg.com/graphics/2018-lehman-debt/?srnd=premium
======
joefranklinsrs
If there's one single life-encompassing economic event this decade, it will be
the emerging market financial crisis. The chart in the article clearly shows
emerging market ex China going from 16 trillion to 29 trillion in 10 years.
And China has incredibly gone from 7 trillion to 40 trillion debt in 10 years
- 300% debt to GDP (not even counting another 20 trillion shadow debt, which
would make it incredibly 450% debt to GDP!!) ((and if you take into account
fake GDP that Chinese provinces have reported, and that authoritarian
governments typically fake their economic growth, and reduce the reported GDP
by 20%, it's a jaw dropping 600% debt to GDP !!!))

The emerging market crisis will accelerate pretty quickly, as soon as one or
two more fed rate hike occurs, or as soon as more tariffs get levied on China
from US, or any of the other black swan event that may occur (hyperinflation
in other emerging markets, internal politics struggle or death of Xi Jing Ping
in China, etc) . Interesting times we live in. Stay safe.

~~~
beat
Before freaking out about CHINA IS DOOMED, look at the historic record.

From 1957 to 2017, per capita GDP in China grew from $68.24 to $8830.17.
That's over a thousand times more productive. You can angst about faked
numbers or whatever all you like, but the trends are plainly obvious here.
China's economy has grown consistently at an extraordinary rate for a long
time now, and there's no obvious evidence that a collapse is just around the
corner.

~~~
joefranklinsrs
What an odd comment to make :) It's true you can ignore all economic reality
and focus on growth (fake or real). But history time and time again has shown
that NOBODY escapes economic reality. Nothing goes up forever.

"Debt, we've learned, is the match that lights the fire of every crisis. Every
crisis has its own set of villains - pick your favorite: bankers, regulators,
central bankers, politicians, overzealous consumers, credit rating agencies -
but all require one similar ingredient to create a true crisis: too much
leverage."

~~~
berbec
Who's that quote attributable to, with a link if you have one? It's brilliant.

~~~
severine
Andrew Ross Sorkin?
[https://www.nytimes.com/2018/09/10/business/dealbook/financi...](https://www.nytimes.com/2018/09/10/business/dealbook/financial-
crisis-trump.html)

~~~
berbec
Thanks. Brilliant article too.

------
pjc50
Reminder: $250t debt is $250t assets on someone else's balance sheet. The
money is not owed to aliens but to other humans.

Finding who is is owed to is harder. A big chunk is pension funds, insurers
and so on, where one person's debt is another person's retirement savings.
Which must increase overall as life past retirement does.

But a large chunk is assets of financial industries and the super wealthy, and
in order for it to be net paid down _they have to get poorer_ \- or at least
be forced to reallocate to equities.

(Note also that as interest rates drive ever lower debt naturally expands too.
If they can be driven _negative_ it becomes an advantage.)

~~~
ellius
One of the most illuminating comments I heard recently was on a Bloomberg
podcast where they made the point that fiat money is a closed system. Money
can flow between economic actors, and it can obviously influence behavior, but
in both a theoretical and real sense it is really just an abstraction that
hovers above the physical world. That's not to deny the economic effects of
monetary policy, but I do think it helps clarify a lot of monetary phenomena.

~~~
bduerst
Yep, but the same applies to debt as well. A contractual IOU may say seem
abstract but it can be almost as valuable as the money itself (sometimes
_more_ valuable, with attached APR).

~~~
skybrian
That doesn't seem like a closed system, though? The main limit on debt is the
market's willingness to keep buying it. Figure out a way of increasing trust
and it can go higher.

~~~
bduerst
It's not, which is one of the great benefits of being able to harness debt
financing.

------
Sileni
I don't even really understand how to hedge my bets anymore. It's not like
there's an industry that will be left unaffected by the current economic
climate and... well, the climate. What exactly am I supposed to be working
on/towards if the system itself seems broken?

I'm down to "Hope the problems don't really precipitate in my lifetime, and
don't have kids". I don't feel like that's a solution.

~~~
nostrademons
The current system is actually quite resilient, because it has the built-in
capacity for _parts_ of it to fail without bringing down the whole thing. The
situation you should really be afraid of is when everything is fine, you're
the envy of the world, the Supreme Leader has your back, right up until
there's gunfire in the streets, people are scrambling across the border,
there's no food in the supermarkets, there's suddenly a bloody coup in the
capital, and enterprising oligarches have pilfered the country's coffers.

In practical terms, you should recognize that this feeling is fear and it is
in fact a _feeling_ , and you can choose to own it rather than let it own you.
Stay away from the particular enterprises that everyone says are about to
collapse, and double-down on whatever assets nobody is paying attention to.
Life goes on, and people have to do _something_ , so own the things that
people will be interested in over the next few years. It's _all_ a bubble,
just do your best to ride it.

There were a few asset classes that were clearly looming bubbles in 2008:
housing, CDOs, most hedge funds, Web 2.0 startups. If you were invested in
them at the beginning of the year you probably lost your shirt. Meanwhile, if
you invested in Bitcoin or mobile or sharing economy startups in 2009, you're
likely a millionaire several times over. Housing itself started to become an
attractive investment once the crash was over in 2010, with many landlords
making 10%+ returns annually since then.

~~~
rsync
"The current system is actually quite resilient, because it has the built-in
capacity for parts of it to fail without bringing down the whole thing."

This is false. It is the hallmark of the current economic order that our
systems are very efficient, very interconnected, and _very fragile_.

I shouldn't care whether or not provincial Chinese governors are faking their
economic reports or making bad loans - but of course, I do, since that could
have a ripple effect that makes my business suffer. _I shouldn 't be fragile
to that_ but I am.

Making the system less fragile would require removing some of the
interconnections and the efficiencies. Growth and returns would be lower, but
failures would be localized and less "interesting".

~~~
gobengo
I actually think parent comment to yours was quite measured and appropriate.
Did you fully grok it?

> This is false. It is the hallmark of the current economic order that our
> systems are very efficient, very interconnected, and very fragile.

What evidence do you have to support this? Even in 07 an index-weighted fund
only took 3 years to recover. If you were 50% in bonds, 1 year to recover.

OP was encouraging you to separate your fear from the evidence-backed
likelihood that while you may lose a bit in deliveraging, there are also gains
to be had in the 10-year term.

If you're feeling that things are fragile right now, adjust your allocation to
something more conservative, take a two week vacation, listen to some
mindfulness podcasts to calm down, and then think through where it might make
sense to put 10% of your bets on 10yr+ plays.

~~~
robotrout
The last 10 years of "recovery" have themselves been on the back of more and
more credit and leverage. Pointing to them as some sort of proof that the
system is not fragile is an error. The system has much more debt than it did
in 2007 and is more fragile than ever. The stock market recovery that comforts
you was partially due to central banks such as the BOJ and SNB actually buying
stocks. That is not normal. What happens if they need to unwind those
positions?

Sometimes people discuss things at a systemic level, rather than a personal
level. The person you are lecturing to deleverage may be debt free, with $5M
in Gold in a vault, but still be wistful of a less fragile world economic
system.

------
cs702
This is an alarmist article that ignores lots of important details and vastly
oversimplifies things.

For example, few people realize that one of the largest owners of US
Treasuries and US government sponsored enterprise (i.e., Fannie, Freddie, and
Ginnie Mac, or collectively the GSEs) debt holdings is... the US government
itself, via the Federal Reserve. As of yesterday, the Fed _owns_ and _is
earning interest income_ on $2.3 trillion of treasuries and $1.9 trillion of
GSE debt.[a]

In other words, the US federal government and GSE-guaranteed borrowers owe
$4.2 trillion to... the US federal government itself.

Among other things, this means the US treasury is currently paying annual
interest on $2.3 trillion of US treasuries to the Fed, and at the end of the
year the Fed hands over all that earned interest to the US treasury, in
perfectly circular fashion.

This startling fact is just one of _many_ \-- many! -- important details about
modern monetary systems that are generally poorly understood by the public and
which are utterly ignored by this article. Don't waste time reading it.

[a]
[https://www.federalreserve.gov/releases/h41/current/h41.htm#...](https://www.federalreserve.gov/releases/h41/current/h41.htm#h41tab1)

~~~
mastermojo
It was hard for me to gauge what percentage of total debt that is, so a quick
search indicates that by end of year 2018 the US government debt is going to
be 21.4 trillion.

Roughly 20% of US government debt is held by itself.

~~~
stonemetal
According to the national debt's Wikipedia page 5.7 trillion is owned by the
government. That ends up being about a forth of it.

------
PowerfulWizard
I'm sure I've complained about this before, I'd love to read a similar article
to this that compares two quantities that share the same unit. Debt is in
dollars and GDP is in dollars per year. Those are different units.

For example, tax revenue versus debt service payments -- or where are the debt
service payments actually going? Or future debt service vs future tax revenue
under different scenarios. Or for that matter, what are the actual constraints
to borrowing and how can they change.

~~~
AnimalMuppet
Yes, you've complained about it before - more than once. (At least, someone
has - I don't specifically remember if it was you.)

And it's a valid point. The units are wrong for them to be compared.

And yet, it's only half of a valid point, because the only thing people are
doing with that ratio is comparing it to the same ratio for other years or
other countries. The number can be dimensionally wrong and still be useful to
use in that way.

Why would the number be useful to use in that way? Well, it seems intuitively
reasonable to say that the bigger an economy is, the more debt it can carry
without the debt burden being any more of a strain. The US can carry more debt
than Vanuatu can, and not because the US government is more credit-worthy. So
scaling the debt by GDP makes some sense.

And, in fact, dimensional analysis can make sense of this. Let's say the GDP
is $10 Trillion. Well, it's not really $10 Trillion, it's $10 Trillion/year.
If the debt is $30 Trillion, then the ratio is $32 Trillion / ($10
Trillion/year), which equals 3.2 years. That's how long it would take to pay
off the debt using 100% of the GDP (which of course never happens, but it's
still a measure of how much of a load the debt is). So when you see them
report that debt is 320% of GDP, what they're really saying is that the debt
load is 3.2 years.

~~~
nabla9
This is also a good point.

But it's not as easy to interpret as you say. The currency, maturity
distribution and interest rate of the debt are all important. If the average
maturity is 20 years for 1%, it's completely different from 3 years and 5
percent.

Differentiating debt in foreign or domestic currency is even more important.
In the US and Japan all government debt is in local currency. It's completely
different problem from countries like Venezuela or Argentina that have also
debt in foreign currency. Hyperinflation occurs only in countries with large
debts in external currencies.

------
apo
_After all, how can officials from the Federal Reserve to the Bank of Japan
even pretend to know how to reverse what they’ve done over the past decade?_

As I understand the US Fed plan, treasuries bought under QE would be allowed
to mature without buying replacements. These assets were purchased with a
variety of maturity dates. In other words, the bonds simply disappear on their
own - not all at once but gradually.

The problem in Japan is much worse because the central bank has bought ETFs
directly and is now a major holder.

[https://asia.nikkei.com/Economy/BOJ-is-top-10-shareholder-
in...](https://asia.nikkei.com/Economy/BOJ-is-top-10-shareholder-in-40-of-
Japan-s-listed-companies)

Any unwinding of the BOJ position would lead to major disruptions.

~~~
NTDF9
> Any unwinding of the BOJ position would lead to major disruptions.

That's just pushing the inevitable. A lot of stocks went up because of debt.
Those stocks needed to come down. In a real capitalist system, the companies
with declining stocks would be replaced by new ones. But BOJ intervened (for
good reason) and now they are in a painful slow decline.

Pull a bandaid quick vs pull it over time!

------
ArtWomb
Wow. I assumed global deficits were approx $50T in the QE-era. With Global
World Product (GWP) ballpark $75-100T. And annual global growth rates
averaging 3-4% in good times.

Even with old numbers. And the assumption interest rates will remain below
historical means. There is the possibility creditors can never be paid back.

But with these new estimates of 3X leverage? Time has come to think seriously
about debt relief and cancellation. Not top down this time, but bottom up.
Starting with direct injection into student loans, home mortgages, medical,
small business loans, etc.

------
roymurdock
this is a bad article

it harps incessantly on debt, throwing out scary, big numbers ($250T! $40T in
china!) but doesn't explain why increasing government debt is an issue

there is a reason to worry if the interest rate on the government debt is
larger than the growth rate of the economy

currently that average interest rate is below 3 percent [1], so for any
countries with >3% economic growth, it really doesn't matter - they'll be able
to make their interest payments to one another (most big holders of gov debt
are other govs themselves)

financial and household debt is down across developed economies, and corporate
debt is about the same as it was in 2008

furthermore there is no discussion of what could trigger a debt collection
death spiral/meltdown, other than "the world's second largest economy is now
coming to terms with rising corporate defaults", backed up by 0 context or
data

the real worry would be continued slowdown in GDP growth ala "secular
stagnation" that many prominent economists are exploring - if you're not
growing your income, you can't pay down your debt, and you have to start
cutting costs (healthcare, education, defense)

debt has a bad connotation and is easy to sensationalize, so articles like
this get attention, but there's no news, argument, or takeaway to be had from
reading it

[1] [https://www.nytimes.com/2018/09/11/opinion/on-the-debt-
non-s...](https://www.nytimes.com/2018/09/11/opinion/on-the-debt-non-
spiral.html)

~~~
jondubois
>> currently that average interest rate is below 3 percent [1], so for any
countries with >3% economic growth, it really doesn't matter - they'll be able
to make their interest payments to one another

What does 3% economic growth mean? Is it measured in terms of that country's
own currency? But isn't that currency's value inversely proportional to the
amount of money which was borrowed from the Fed? So the higher the interest
rate is, the more new money the government has to borrow from the Fed in order
to pay back its old debt, the less the currency becomes worth, the less
meaningful this 'economic growth' percentage becomes (because that growth is
measured in this fast-deflating currency). This seems to be mind-numbingly
complex.

~~~
ArchTypical
> Is it measured in terms of that country's own currency?

No. The obvious makes that a useless measure. GDP is used, modified to ignore
what government factions like to conveniently manipulate or modify. Lumping in
tech stocks and pharma was the latest trick in the USA.

------
megaman8
I see no intention from governments of ever paying off that debt. All I see,
worldwide and US is more and more spending. At one point in the future we
won't be able to pay for it anymore. So, what happens if everyone finds out
they're not getting their money back? i hope we never find out.

30% of US debt is owned by intergovernmental agencies: like Social
security/medicare/military retirement funds - so that might go down the tubes.

The other 70% of US debt is public debt, of which almost half is owned by
foreign governments and investors.

[https://www.thebalance.com/who-owns-the-u-s-national-
debt-33...](https://www.thebalance.com/who-owns-the-u-s-national-debt-3306124)

~~~
mempko
If governments paid off their debt, there would be no money. Money IS debt.

~~~
appleflaxen
you keep posting this all over the thread, but it's not true.

money requires no interest payment.

debt does.

~~~
saganus
There's a very interesting explanation on why you can consider money as being
debt by Paul Grignon [0].

Of course, there are critics of this view and it's not necessarily 100%
correct, but it does seem plausible.

[0]
[https://en.wikipedia.org/wiki/Money_as_Debt](https://en.wikipedia.org/wiki/Money_as_Debt)

------
jondubois
The current system seems extremely fragile to me; it's as if the tiniest
miscalculation in terms of government debt versus economic growth could set a
country on an irreversible course to hyperinflation (with respect to other
countries' currencies). It seems ridiculous that governments have the power to
seal the financial fate of their citizens in this way; irrespective of the
actual economic output of those citizens. I think this makes a strong case for
cryptocurrencies; citizens should be allowed to choose a currency which
reflects their own level of financial discipline (and not that of their
government).

------
EGreg
The difference between debt-money and value-money is that debt-money is
supposed to originally be backed by cashflows of value-money but is really
paid back by an ever expanding amount of debt-money.

In other words, things are getting more and more leveraged. The amount of
money to actual goods and services is exponentially increasing. So the value
of money steadily decreases and we get inflation.

The danger is that this money evaporates as people default on loans.

As long as interest rates are low, people don’t default very much, but as they
rise, the defaults happen.

Why do central banks need to raise interest rates at all? It just leads to a
bloodbath as some loans get renegotiated.

Why not just have one predictable interest rate like Milton Friedman spoke
about?

It seems to me that the central banks fix the next crisis by QA and low base
interest rates. Why not just keep them low and let people default for actual
reasons, instead of having a terrible time taking out a loan during high
interest rate season?

If our money supply is going to be so debt based, why raise base interest
rates? To “reload” so you can swoop in and save people from a money supply
crunch you induced?

------
mirimir
> Because of that, the fretting about the Fed’s current balance-sheet runoff
> plan is almost comical. There’s simply too much debt in the system and no
> clear path to truly paying it off. Not even central bank officials are
> pretending they’ll shed all their holdings — estimates fluctuate around
> ending at $2.5 trillion.

I thought that the plan was to eventually inflate the debt away. But maybe
that's just cynical conspiracy theory.

------
everdev
I remember the national being a huge issue in the 80s (and probably before).
This send like important and scary reporting but I'm not sure how this time is
different from all the other alarm bells over the past 40+ years.

Is this a case of people calling wolf or is this a real crisis just decades in
the making?

~~~
opportune
This isn’t about national debt but global debt. The US national debt at
present is not much of an issue because the dollar is strong and interest
rates are still quite low. The risk is for less economically strong countries
who are susceptible to changing foreign interest rates / exchange ratios.

~~~
everdev
> no one is quite sure what happens when a global superpower like Japan
> reaches a debt-to-GDP ratio of 224 percent. The U.S., U.K. and France have
> all surpassed the 100 percent level

It sounds like the author is nervous about the rise of US debt as well.

------
paulpauper
Debt relative to GDP according to the chart shown in the article went up 14%
in a decade from 280 to 380 trillion, which does not seem that bad imho.
Relative debt is more important than nominal debt.

------
DesiLurker
This is a bit older but good background presentation by Richard Duncan:
[https://vimeo.com/101487179](https://vimeo.com/101487179)

PS: Ignore the title

------
thomasmarriott
"The system is insolvent. No one knows what to do next — except repeat the
insanity till the next bubble blows. That'll be the one. The big one."

— Gekko, Wall Street 2, 2010

#thewayoutisup

------
axilmar
Would it work if all debts on Earth were simultaneously erased by creating the
relevant amounts of money?

------
techie128
Why is there no mention of India?

------
stretchwithme
Isn't that $35K for every man, woman and child alive? How can that be?

------
dr_win
To truly understand how bad it is, we would have to analyse the 250T figure in
more detail.

There is a "free debt" component to it which was generated via seigniorage[1]
and "real debt" to people, companies and other economic actors. It seems to me
that many commenters here see only one part of it.

To illustrate it, let me give you an example how "free debt" can be generated
by a government. Imagine for a second that we have one world government (WG)
and one world currency. And assume that we are in a peace time when collective
world productivity grows 3% every year. World's central bank (WCB) targets 2%
inflation. Also assume that velocity of money[2] is constant and in general
people's behave the same in time. This effectively means WCB can "freely
print" 5% of new money without causing any real problem. But who should get
the new money? Instead of simply printing it and directly giving it to
someone, they have pretty sophisticated/obfuscated mechanisms how to introduce
the new money to the system. Typically part of that new money is given to the
WG in exchange for WG's bonds. The new money is effectively introduced as an
interest-bearing debt. But please note that this debt is "free" for WG. WCB
will never want to repay the debt (by allowing WG's debt to always roll over).
And also note that WCB is part of WG. That means the collected interest WG
formally paid to WCB is then given back to WG.

Of course WG can also sell bonds to people, companies and other actors. This
debt is the "real debt" which must be paid back. But let's assume WG is
prudent and does not do that.

You can observe that WG can continue this as long the world productivity is
growing better than -2%

The problem with "free debt" comes when the growth is even worse (e.g. in war
times) or when velocity of money gets faster suddenly (or there are other
inflation pressures or shocks). WCB should reverse this mechanism in this bad
case. It has to "pump excess currency out of the system" by selling its bonds
and destroying the currency to hit the 2% inflation target (technically it
would do it by not allowing complete rotation of WG's debt).

Of course real world scenario is much more complex than that. And real
governments additionally take "real debt" where usual rules apply. The
question for us is how big part of those 250T is the "real debt".

[1]
[https://en.wikipedia.org/wiki/Seigniorage](https://en.wikipedia.org/wiki/Seigniorage)
[2]
[https://en.wikipedia.org/wiki/Velocity_of_money](https://en.wikipedia.org/wiki/Velocity_of_money)

------
daddyofive
What a wonderful article. I think that there are two sides to this coin: the
nature of the debt and the nature of the repayment. Even the smallest and most
well mannered debt is a problem if there is no path to repayment. And even
large, nasty debt is ok as long as the people borrowing have done their
homework and have a solid plan to repay. So this article did a great job of
profiling the debt but it didn’t go into enough detail about the borrowers. If
interest rates have been so low, and the borrowers have been somewhat lucid,
even this large debt can be paid off without any crisis?

------
HIPisTheAnswer
Using 150k tonnes of above ground gold, if all of it was minted into currency,
would equal +- 100M dollars. Probably not more than 10% is minted currency
coins - .999 isn't for currency use. So there is about 10M dollars in
existence.

~~~
CompelTechnic
1200 USD per ounce x 16 oz per lb x 2000 lb per ton x 150,000 =5.76E12 USD

5,760,000,000,000 USD, except for the fact that Troy ounces are slightly
different than normal ounces. Too lazy to look up.

~~~
HIPisTheAnswer
a dollar is 24 3/4 grains of gold.

edit:typo

~~~
CompelTechnic
Ah I see.

------
mempko
Before you read the article, keep one thing in mind, Money IS debt. If there
is no debt, there is no money. Another way of looking at government debt is
private sector savings.

