Global debt pyramid grows to infinity

At issue is the future of banks

Мировая долговая пирамида не растёт до бесконечности

In early November, became known fresh assessment of the world debt announcement by Kristalina Georgieva, the new Executive Director of the IMF. “Global debt, both public and private, reached a record high of 188 trillion dollars. It is about 230% of the global production”, said Georgieva at the 20th annual conference of economic research Annual Research Conference in Washington.

The previous Director of the IMF, Christine Lagarde, the company has previously noted that global debt is 182 trillion. dollars. That is the year the total debt worldwide has increased by 6 trillion. dollars. For comparison, the expected growth of world GDP in 2019 is projected at around 3% (about 2.5 trillion. dollars). But the global economy growth slows down, to ensure payment of all the more problematic.

December 1, Bloomberg called a different assessment of the world’s debt, which exceeds the IMF almost a third. According to this, in mid-2019 total debt of all countries in all sectors of the economy reached a record 250 trillion dollars. If this amount is divided by all that dwell on the Earth, including the elderly and babies, then per capita will have 32.5 thousand dollars. Bloomberg makes reference to the IMF, the world Bank, the Bank for international settlements, Institute of international Finance (The Institute of International Finance). It turns out that the MS Georgieva deliberately underestimated figure debt, not to frighten people.

I will cite some figures from a publication by Bloomberg that gives insight into the dynamics of the world’s total debt in 20 years (trillion. us.) 1999 – 83,9; 2004 – 126,1; 2009 – of 186.0; 2014 – of 215.1; 2019 (mid-year) 250,9. For the first half of 2019, the global debt increased by 7.5 trillion. dollars. The bulk of this increase has provided U.S. and China (60%). During the second half of the year, the debt can increase by another 4.4 trillion. dollars. and by the end of 2019 to reach 255,3 trillion. dollars. Thus, for two decades, the absolute amount of global debt has grown three times.

Now look at the relative level of debt by sectors of economy (table. 1)

Table. 1.

The relative level of world debt by major sectors (% of GDP)

Sector

2009*

2019**

Financial Corporation

59,79

59,86

Non-financial corporations

82,72

91,95

The public sector

64,96

87,68

The household sector

92,34

80,42

Total

299,81

319,91

* At the end of the year
** Mid-year

The relative level of debt in the sector of financial corporations over the decade remained unchanged. In the household sector, it fell slightly. And non-financial corporations sector and the public sector has increased markedly. In the end, the overall relative level of world debt is almost 300% of GDP in 2009 rose to nearly 320% of GDP in 2019.

For the period 2009-2019. the growth of world debt will reach about 70 trillion. dollars. The bulk of the increase provided to non-financial corporations and government.

Debt of the world is formed through the use of tools such as commercial Bank loans, loans to non-banking institutions and borrowings through bond placement. Key source of growth in debt has become the global bond market, the volume of which reached 115 trillion. dollars.

If in 2018 Christine Lagarde as IMF Director urged member countries of the Fund to reduce the debt of their economies, it seems, the following year, she already as the President of the European Central Bank (ECB) will do the opposite. So says Bloomberg.

All major world Central banks (including ECB) have embarked on a reduction in the already low key interest rates. This leads to a decrease in interest rates on Bank loans, loans to non-financial organizations and bonds. The result will be to retard the growth and even begin to reduce spending on debt service. The reduction of the key rate of the fed has led to the fact that interest rates on US treasuries fell below 2 percent, today they are at the level of 1.85%. And the interest rates on Japanese Treasury bonds have almost zero value.

In total, according to Bloomberg, currently in the world financial bond market with a negative percentage of traded paper for about $ 12 trillion. dollars. A lot of them especially in the Eurozone. Christine Lagarde will continue its policy of Mario Draghi to encourage the growth of public debt in Europe.

However, the global debt pyramid cannot increase indefinitely. The relative levels of debt are already substantially higher than those of 2007-before the global financial crisis. And the euphoria generated by the exchange rate of the Central Bank to reduce key interest rates, very dangerous. The increased supply of the drug money (cheap and even free loans) the economy revives. New trillions of credits and loans are not in the real economy and on financial markets where bubbles inflated. And crafty statistics calls these bubbles increase “economic growth”. The IMF and the world Bank predicts that in 2019 the world’s GDP will increase by 3%. In fact, the real increase in the production of goods and services on the strength of 1 per cent, the remaining two percent – the growth of the bubbles. Real GDP growth, purified from the statistics of foam is on par with population growth on the planet or are already behind.

Called into question the future of the banks who do not understand how they work, if the epidemic of negative interest rates will take their Deposit and credit operations. Even more acute problems such institutional investors as insurance companies and pension funds. They form their assets with debt securities having high reliability, but today, these papers do not give a income and even generate losses. Those institutional investors that want to survive in the conditions of negative rates, has to invest in the securities with high risks. The rest are doomed to extinction.

Conducted in the United States a study of 300 pension funds, administered on the state level, showed that they had at the beginning of 2019, the amount not covered by assets liabilities amounted to 6 trillion. dollars. Rate US fed on further reduction of the key rate threatens a complete collapse of the pension system of the country.

Remember that in the 20 years of the twentieth century in America there was a boom. And in 1927, there had been signs of crisis in the stock market. The fed then resorted to lowering the discount rate (similar to the current key rate). This has prolonged the boom in the stock market; it even seemed that the era of prosperity, but the wand failed, and in October 1929 on the new York stock exchange happened on “black Thursday”. From this spark ignited the economic crisis first in the USA then in the rest of the world (excluding the USSR). The global economic crisis lasted ten years. “Completed” its only the Second world war.

Current tricks of the Central banks of the coming financial crisis will not cancel, they will only delay its onset. And the longer they will resort to drugs of low and negative rates, the harder will be the consequences of the crisis.Valentin Katasonov

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