#84. Looking ahead


It is customary to use the start of the year to set out some forecasts. Though I’ve not previously done this, I’ve decided to make an exception this time – mainly because I’m convinced that the wrong things are being forecast.

Central forecasts tend to focus on real GDP, but in so doing they miss at least three critical parameters.

The first is the relationship between growth and borrowing.

The second is the absolute scale of debt, and our ability to manage it.

The third is the impact of a tightening resource set on the real value of global economic output.

Most commentators produce projections for growth in GDP, and mine are for global real growth of around 2.3% between 2017 and 2020. I expect growth to slow, but to remain positive, in countries such as the United States, Britain and China.

It’s worth noting, in passing, that these growth numbers do not do much to boost the prosperity of the individual, since they correspond to very modest per capita improvements once population growth is taken into account. Moreover, the cost of household essentials is likely to grow more rapidly than general inflation through the forecast period.

What is more intriguing than straightforward growth projections, and surely more important too, is the trajectory of indebtedness accompanying these growth estimates. Between 2000 and 2015, and expressed at constant 2015 dollar values, global real GDP expanded by $27 trillion – but this came at the expense of $87 trillion in additional indebtedness (a number which excludes the inter-bank or “financial” sector). This meant that, in inflation-adjusted terms, each growth dollar cost $3.25 in net new debt.

If anything, this borrowing-to-growth number may worsen as we look forward, my projection being that the world will add almost $3.60 of new debt for each $1 of reported real growth between now and 2020. On this basis, the world should be taking on about $5.8 trillion of net new debt annually, but preliminary indications are that net borrowing substantially exceeded this number in 2016. China has clearly caught the borrowing bug, whilst big business continues to take on cheap debt and use it to buy back stock. Incredible though it may seem, the shock of 2008-09 appears already to be receding from the collective memory, rebuilding pre-2008 attitudes to debt.

On my forecast basis, global real “growth” of $8.2 trillion between now and 2020 is likely to come at a cost of $29 trillion in new debt. If correct, this would lift the global debt-to-GDP ratio to 235% in 2020, compared with 221% in 2015 and 155% in 2000.

Adding everything together, the world would be $116 trillion more indebted in 2020 than in 2000, whilst real GDP would have increased by $35 trillion.

Obviously, this is not a sustainable way to behave. Taking individual economies as examples, the United States would have added $30 trillion in debt for $6 trillion in growth. Britain would have grown by £620bn but borrowed £3,340bn in the process. China’s debt would have increased by $32 trillion for a $12 trillion gain in real GDP.

Moreover, these numbers relate only to formal debt, excluding the financial sector whilst taking no account of quasi-debt obligations such as pension commitments. These are likely to become ever more onerous, particularly in those Western economies in which the population is ageing.

Pretty obviously, we are deluding ourselves where growth is concerned, spending borrowed money and calling this “growth”. Someone does not become more prosperous by increasing his or her overdraft and then spending it – he or she merely looks more prosperous to those who gauge prosperity by looking only at a lifestyle impression conveyed by consumption.

Meanwhile., the global resource set continues to tighten against us, adding to the “economic rent” which we experience, but fail to measure. According to the SEEDS system, the trend energy cost of energy (ECoE) cost us 4% of GDP back in 2000, but now accounts for 8.2%, and will reach 9.6% by 2020. Adjusting real GDP for this indicates that, between 2000 and 2015, the amount of debt added for each “growth” dollar was $3.80, not $3.25 – and that, from here on, each $1 of growth is going to cost us over $4.70 in new borrowing.

Altogether, what we are witnessing is a Ponzi-style financial economy heading for end-game, for four main reasons.

First, we have made growth dependent on borrowing, which was never a sustainable model.

Second, the ratio of efficiency with which we turn borrowing into growth is getting steadily worse.

Third, the demands being made on us by the deterioration of the resource scarcity equation are worsening.

Fourth, the ageing of the population is adding further strains to a system that is already nearing over-stretch.

One thing seems certain – we cannot, for much longer, carry on as we are.


45 thoughts on “#84. Looking ahead

  1. DATA?

    Just to add – the SEEDS system develops a lot of “conventional” as well as surplus energy economics data. I’ve no problem with making some of this available, but would need to define a tight list of what data categories would be of interest. SEEDS covers 19 individual economies plus global aggregates.

    Suggestions are welcome…..

  2. For some years now I’ve been waiting, albeit not with baited breath I must admit, for the event, or sequence of events that trigger the unravelling process of the global debt/pseudo-growth Ponzi scheme which you’ve been describing for some time now.

    Orthodox economists, the political class and the mainstream media don’t seem prepared to latch on to the economy as you describe it. On the wireless in the mornings as I’m surfacing for my day’s duties I hear the same old economists, financiers and journalists droning on about a bit of growth here, a sliver of growth there, a tad of inflation here, a spot of deflation there and so on and so forth, crawling over this industry trend or that sector snippet. But none of them ever seem to cut to the chase in the way in which you’ve been describing matters in the recent past, Tim, nor cut to the big screen scene: we’re on the road to ruin, aren’t we?

    Meantime, the trends all keep heading in the wrong direction, per your post above.

    What’s going on? Moreover, when will the first domino fall, where and what will it look like in real life, so to speak? We should be told …

    • Thank you – and a Happy New Year to you and yours, and congratulations on your excellent new article.

      Ever since 2008 the authorities have been playing “extend and pretend”, and debasing money as part of this process. I’d say they might manage a year or two more of that.

      My late father once stood at a crossroads in an Italian city, watching two cars converging on the junction and wondering which was supposed to stop. Neither did. It’s a little like that now, the two converging projectiles being debt escalation and public anger.

      The debt bubble has to burst some time. Italy is its latest manifestation – the government has put aside EUR 20bn to rescue its banks, but one bank alone is going to need EUR 30bn at least, some say as much as 50bn. For Italian banks collectively, we’re talking sums so huge that Italy alone cannot provide. They can “bail in” bond holders, but these are huge numbers of ordinary savers = voters. Or they can try to persuade Merkel to allow an ECB rescue, but does that open the floodgates – and undermine the euro?

      That’s just Italy. Then think China, or Britain for that matter. In short, another banking crisis is only a matter of “when”, not “if”.

      Then there’s public anger – the Brexit, Trump, Italy sequence is set to continue.

      Dancing on the rim of a volcano can happen for a year or two more, but not longer – and the big debits (debt, and public anger) keep getting bigger…..

    • Thanks; interesting and helpful. The issue remains one of events and timing, methinks. Presumably, there’ll come a time when a series of events coalesce to form the tipping point. Quite what the harbingers of such a series of events might be, I’ve no idea. I assume there’s the issue of confidence at the heart of all this. If there comes a point when some individual or institution or collection of either gains some sort of critical mass or momentum in favour of running scared, then a tipping point is reached, maybe.

      I’m not as close to all this as you are, Tim, but it’s my understanding that the global financial system simply could not endure a re-run of the 2007/08 crisis. Goodness knows what it will look like then if that systemic loss of confidence I mentioned manifests itself. If the politicos move once again to load the cost on to ‘ordinary citizens’ as taxpayers and/or creditors one imagines that we could see (a) the mother of all pandemic bank runs and (b) trouble on the streets?

      One way or another, it does baffle me how we can possibly sustain such rampant and growing private and public indebtedness without somebody eventually getting hurt.

    • Thanks, and yes, confidence (or loss thereof) is the crux. After all, fiat currencies rest on confidence alone.

      So does the banking system. Banks “lend long” (e.g. mortgages, not repayable for decades) and “borrow short” (e.g. depositors, who could all take their money out tomorrow). No bank can operate this timing differential without confidence. One can easily see bank runs happening – for example, Italy, where the EUR 20bn rescue fund might need to be 10 times that amount…..!

      I cannot see how we could survive a re-run of 2008 – just for starters, government balance sheets are drastically more stretched now than when banks were rescued back then.

      As you say, can’t do this without somebody getting hurt. Ponzi schemes only ever end in one way. Bail-ins or “haircuts” for depositors could be politically lethal. To a meaningful extent, the national/global balance sheet is our future – it is the sum of our savings and pensions, less the sum of our future obligations. So, by trashing the balance sheet – borrowing, selling assets, and impairing savings and pension funds – we are sacrificing our (and others’) tomorrows to subsidise our todays.

      P.S. My next article is likely to be “a rescue plan for the British economy” – now that’s a tall order….

  3. I do wonder how any why solvent countries trust the currencies of countries such as ours, that have huge debts. In 1976 Britain had to go to the IMF. What would have happened if Denis Healey had just done a bit of QE instead?

    • If one is an investor, presumably one can read a balance sheet.

      British debt is £4.9 trillion, or 268% of GDP. But this excludes:
      – Financial sector debt (£3.3tn)
      – Private pension shortfalls (£975bn)
      – Unfunded public sector pension commitments (at least £1tn)
      – PFI and nuclear decommissioning

      Add this lot up and it exceeds £10tn, or 550% of GDP.

      Investors who bought sterling and/or sterling assets during 2015 are now sitting on FX losses of almost 20%.

      Will they one day decide that putting more money into Britain amounts to pouring good money after bad? The game is up if they do.

      Please note, Healey et al were turned down by commercial lenders before taking that strings-attached IMF loan. Adjusted for inflation, it was equivalent to perhaps £50bn in today’s money – in other words, peanuts compared to our problems today.

    • Your debt figures for the UK are way off. The UK debt level as of 2016 was just over £1.6 trillion and that equated to roughly 83% of debt to GDP. That is scary for sure and nothing to be laid back about but your figures are completely wrong. Japan has the highest debt to GDP ratio of any country on the planet (over 250%) because they have gone QE mad, the BOJ now owns most of their stock market!!!!!

    • I think you’re looking at government debt – I’m referring to total debt, all sectors except inter-bank. The BIS figure for the end of 2015 is £4,904bn = $7,254bn = 268% of GDP.

      I agree with you about Japan, though…..

    • Hi Dr Tim

      I’m having a bit of difficulty with your UK debt figures. I’ve accessed the OBR’s Fiscal Sustainability (FS) Report for Jan 2017 (see http://budgetresponsibility.org.uk/fsr/fiscal-sustainability-report-january-2017/ )

      On a side note I find it worrying that the OBR’s Charter was amended in Oct 2015 to report on FS biannually rather than annually – see Page 2 last paragraph).

      The FS report is underpinned by Analytical Papers which include more detail and were produced in mid-2016 (see http://budgetresponsibility.org.uk/fsr/fiscal-sustainability-analytical-papers-july-2016/ )

      Both reports cover the FY 2014-15, and the FS Analytical Paper (FSAP) on Public Sector Balance Sheet provides WGA figures on Unfunded Public Sector Pension Schemes (Page 20 ->) – net liabilities of £1.492tn as of 31 Mar 2015 – but with lots of provisos on how it is calculated.

      PFI (Page 24->) notes: “Based on ESA10 guidelines, the capital costs of some PFI deals are recognised as liabilities on the National Accounts public sector balance sheet, but many are not. As well as lacking transparency, this generates a perception that PFI has been used as a way to hold down official estimates of public sector indebtedness for a given amount of overall capital spending, rather than to achieve value for money”

      The FSAP cross-references to a Treasury report published in Dec 2016 (see https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/579271/PFI_and_PF2_projects_2016_summary_data.pdf ), which records that as of 31 Mar 2016 there were 716 PPP/PFI/PF2 projects with a “Capital Value” of £59.4bn, but also notes (Page B1) that: “This publication only includes projects that are centrally supported by departments and devolved administrations and procured under the standard PFI and PF2 contract terms. Other forms of PPP projects are not covered such as the NHS Lift schemes, those procured under the Non Profit Distributing (NPD) model used by the devolved administrations and any PPP project that does not receive a direct revenue support grant” It reports PFI liabilities “on balance sheet” at £38.2bn, but suggest it could be higher at £39.4bn (Page 26)

      The FSAP reports Nuclear Decommissioning as “on Balance Sheet” (Table 3.11 Page 30) at £82.9bn (up from 77.4bn in 2013-14, however both figures have been “adjusted”.

      All in all a minefield, however my core question is how do I get from the published UK National Debt figure of c£1.6tn to the 2015 Q4 figure reported by BIS of £2,685bn (now reporting £2,688.1bn for 2016 Q2) (see http://stats.bis.org/statx/srs/table/c3?c=GB&p=20154 )

      As to how UKGOV is reacting I have some info on this which I’ll report in a separate post.

      Best Regards

    • Jim

      This is something I’ve spent a lot of time on in the past – it’s far too complex to be explained fully here, but let’s try.

      For end-2015, BIS states UK debt at £4,904bn, including government at £1,954bn and households at £1,578bn. The government piece is stated at market value, i.e. the traded prices of government debt. This differs from the face value of these debts, stated by the BIS at £1,601bn.

      The UK itself reports two different government debt numbers. The first is under UK accounting practices, but the second (and higher) number is stated under the more rigorous Maastricht Treaty definition used in the Euro area.

      These government debt numbers exclude financial sector interventions resulting from bank rescues. These are published separately.

      The national total (£4.9tn) excludes inter-bank or “financial” sector debt. From other sources I put this at £3.35tn. So total debt is much higher on this basis, about £8.3tn.

      Then there are “quasi-debts”, most notably government pension commitments to its employees. The figure of £1.45tn is about right. These are not formally “debt”, but would in practice be impossible to walk away from. The same category covers PFI and nuclear provisions.

      Nationally, there are also big deficits in private pension provision, reported in the FT at £740bn.

      Put all of this together and the total is at least £10.3tn, or 550% of GDP. So “Brexit” might not be the only reason for the weakness of GBP….

  4. Hi Tim

    Happy New Year and thanks for another insightful piece.

    The tipping point for all of this may not of course be related to economics; war or a natural disaster could set things off.

    However, I agree with your analysis above and sense that the EZ is likely to supply the economic candidate to set the hare running. Ironically the EU bail in rules are, in my view, potentially lethal. If bondholders or, and especially, uninsured depositors are hit then this will cause a run on all banks and will, at the very least, cause substantial disruption to the system. A bail in sounds a good idea but, in my view, may actually be substantially worse than a bail out which can be carried out quietly behind the scenes as a technocratic exercise. However, this should not obscure the fact that, as far as the banks are concerned, there are no good solutions this side of a complete change of structure and the reward system within banking; it is a sector that needs very substantial change which will not be forthcoming this side of a crisis.

    It’s also pretty clear that in the EU the issues surrounding immigration and refugees and the crime waves in parts of the EU are going to provide a massive backlash which will destabilize the whole political system and as the political system goes so goes the economic.

    The slow (but not that slow) burn aspects are, in my view, the issues surrounding demographics and the march of AI/robotics. Both are going to eat away at the accepted models within society and are already putting us on a lower secular growth path. Both these issues are barely mentioned by governments. let alone actively addressed, and that again will cause trouble going forward,

    I hope indeed it is a happy year but I do have my doubts that it will be.

    • Thanks Bob, and some pertinent comments as always.

      First, economics needn’t be the tipping-point – but economics and politics do tend to coincide.

      The problem with a bail-in is that it takes money from depositors, including those who own “bonds” which they thought was just another name for a savings account. People were angry enough at seeing banks rescued with their taxes – seeing their own “money in the bank” used for this would be politically inflamatory.

      The EU is in real trouble. Three countries are its backbone – of which (a) Italy is now crippled by the banking crisis and political paralysis, (b) France will either elect Marine Le Pen, or a mainstream party which defeats her by adopting much of the FN’s nationalist agenda, and (c) Germany, where open-doors immigration is unpopular, and agreeing to an ECB bail-out of Italian banks might look like a blank cheque written on the German taxpayer.

      Robotics are a huge challenge. At its simplest, if we don’t need workers, i.e. wage-earners, where does demand come from? And to whom do profits go – to the owners of the robots plus a thin layer of technical employees?

    • At another extreme (regarding robots ) is the science fiction short story ‘The Midas Plague’ where robots have created so much wealth that it is the duty of the ‘poorer’ citizens to consume as much as they can while the rich can sit at home consuming very little. Of course with an energy crisis on the horizon the robots might have nothing to power them anyway. Regarding energy you might find this useful – stratosolar.com.

  5. Hello Dr. Tim, and a Happy New Year to you.
    I read this article with your previous work with Tullet, “A Perfect Storm” very much in mind.
    I do recall from this earlier work that you point out that GDP is in itself is a very flawed, if not downright fiddled, Statistic.
    So in reality, things are actually worse than most would openly admit to.
    Your replies to earlier comments on this article here, say it is just a question of When it all goes belly up, and no longer a question of If. I believe that too.
    What really puzzles me though, is Who for example is still buying all this, for example British, debt ?
    Surely these people themselves must know that something is deeply wrong ?
    Who in their right mind would lend the government money to fritter away ?
    Do they really still believe that Britannia Rules the Waves, and that we can just go and plunder our colonies to settle our tab when it comes due ?

    • Thank you, and a Happy New Year to you too.

      When you talk about lending to a government, what it involves is buying bonds. These are traded, of course, and their price is the inverse of the interest rate. So, whilst interest rates have been falling, bond prices have gone up. Only now is this process starting to go into reverse.

      So buyers are seeking capital gains, planning to sell long before the bond is redeemed, i.e. paid back and cancelled. Governments fund these redemptions by – issuing more bonds.

      It’s really about confidence – bonds are bought on the basis of trust. The “event horizon” here is the day when confidence ends. With some governments, that day is coming soon….

  6. I like to try to develop an actual model in my head to try to understand stuff. Bear with me, Currently, I’m seeing the whole economic mess as a black hole fuelled by central banks. Where you have a black hole there’s an event horizon wherein the laws of physics no longer apply. That’s where I see us currently. Various bits of the economy are hoovering up vast amounts of the central banks fuel and where there is too much of this, hyper-inflation kicks in but only in those bits. So, NHS, a black hole perfectly able to spend huge amounts on – take your pick – CEOs, 2000% increases in an individual drug, or (more locally) over 1 million for a small carpark which they already owned. Event horizon economics. This vast amount of central bank fuel has to go somewhere since it doesn’t exist outside the event horizon. so, why not Britain – as Tim said we’re a knackered horse but a very pretty one. The problem would come when the central banks stop fuelling the black hole otherwise it’s pretty stable – ludicrous but stable. Just a thought!

    • Ahh, now I see it written down maybe the problem would come if anyone with access to the fuel is stupid enough to convert it into actual money and buy real things. That would be hyper-inflation and game over. Fun times ahead!

    • Now I understand why there have been austerity policies for the lower classes, to stop them spending money on real stuff which would trigger hyperinflation. Thanks for the insight Nigel.

      Tim I read the update of your book a couple of months back. The rate of fall of the EROEI is frightening, and most everybody is blind to it. When the shock hits people are going to go hungry, fast.

      Best regards to you Tim.


    • Thanks Dan.

      The risk of major war intrigues me, though I’m not clear on exactly where, or why. (FYI, I follow geopolitics closely, and in the past have flown from a carrier, been on commando exercises and been aboard a nuclear submarine – but I tend not to bring defence/geopolitics in here!)

      There are at least two historic fault-lines worth watching. One runs east-west across the Med. A second runs roughly northwest-southeast through Sarajevo.

      At the moment, though, I cannot see who would fight whom. Militarily, Russia is no match for the US. Russia might try to push west if NATO is weakened. The historic Med fault line is being crossed by refugees, not soldiers. Any conflict involving China is likely to be local, i.e. in Chinese littoral waters. The Russians seem paranoid about China pushing north into the resource wealth of Russia’s far east, but I don’t see that, somehow.

      So – where?

    • Thanks Tim, I hope you’re right. I for one am grateful not to have been subjected to the miseries that earlier generations of Brits endured, or that many unfortunates around the world (e.g. Syria) are experiencing today.

      3 main scenarios for “where” that I can see (from my uninformed perspective):

      Firstly, US vs China. This for a number of reasons, including arguments about who owes what to whom, but especially to prevent China becoming too powerful and threatening US dominance. From a certain viewpoint, it makes absolute sense to strike sooner rather than later (not my view, but one I can see some hawkish military people adopting). Trump may be cosying up to Russia for precisely this reason – get them on-side in order to prevent the 2 “ganging up” against the US. That neither Russia or China are any match for US might does not matter – China in particular could become so in years/decades to come, and the US (at least certain factions in command) may wish to “nip this in the bud”. This could also “reset the clock” as far as debt etc is concerned, and gives an excuse for a major change to the financial system. A trigger could be those islands in the South China Sea, or something else.

      Secondly, a situation like Syria could flare-up, drawing in all related parties through the sheer stupidity those involved.

      Thirdly, civil war scenarios – attacks against certain religious/ethnic groups escalating massively, or between various groups.

      Re-reading this makes me wonder if I’m a tin-foil-hatted nutter! If you think I’m way off the mark, I’d be delighted to hear it (but as we know, stranger things have happened!)

    • Given the “Russian Hacking” story that’s being shouted from the rooftops here, I’m guessing that the most likely near-term threat is a NATO attack on Russia.

  7. Tim,
    Happy new year
    A rather simplistic question around debt : namely to whom is the debt repaid or who has provided the funds to fund the debt. .And if the debt is not repaid [besides lenders not continuing to buy country X’s bonds so cutting access to funds ] …..who goes bust …the world economy ?

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  9. Thanks Dr Morgan for another engaging read.
    With regards to oil supply BP in their statistical review of oil reserves have been increasing ‘proven reserves of oil’ and OPEC have just cut production in an attempt to clear a ‘glut’ of cheap oil ‘flooding the market’. Right now it just doesn’t feel like there is a ‘deterioration of the resource scarcity equation’ ..at least with regards to oil. I agree with the theory of your analysis but it just doesn’t chime with reality as i see it day to day.

    My instinct is that growing world population/ oil consumption together with depletion setting in on the more mature wells MUST eventually lead to shortages and price hikes…but this scenario has always been just over the horizon for as long as I can remember….

    • Ken, the Baltic Dry Index tanked indicating that it was demand destruction rather than too much oil. No trade, no need for oil.

    • Ken – As I see it, more demand for oil coupled with dwindling supply will indeed lead to higher prices, but higher only in terms of the average person’s ability to pay. Higher prices can only be supported if people can continue to buy it at the higher prices. In the case of oil, higher prices tend to make everything more expensive, because such a wide range of economic activity depends on it: manufacture, distribution, personal transportation, etc. So higher prices tend to be self-limiting. The more you pay for gas, the less you have for other purchases, which has a depressing effect on economic activity, which reduces the price of gas… The result is more of a swing in the price of fuel between boom and bust levels, perhaps superimposed on an upward trend.

      The upward trend is the real problem. In a world of surplus labor, workers are not in a position to demand higher wages, and so “fall behind” in their ability to buy fuel. At some point, it will be impractical for some such people to own a car, at which point they drop out of the automobile economy, depressing that industry as well as ancillary industries such as motor fuels and auto insurance. This will serve as a brake on the escalating cost of motor fuels.

      The long term effect is to narrow the group of people who purchase motor fuels. One might expect at some far off date that such fuels will be available only to select groups: the wealthy, governments, the military, emergency services, agriculture. Interestingly, one would also expect that its commercial use would narrow to productive endeavors rather than consumption. Chain saws, for example, use fuel very efficiently in the sense that the BTU content of the product is very much greater than the BTU content of the fuel used to render that product into usable form, so I’m pretty sure chain saws are a good long-term bet. Consumption for transportation will similarly move toward productive pursuits — distribution, for example, or by people in the trades who use their vehicles as mobile workshops. Personal consumption for non-productive purposes will be sharply curtailed, and the emphasis will be on the most efficient uses possible. Lawnmowers, being more or less a zero in terms of productive use of fuel, well, you can see how this is going to play out…

      But I’m guessing that the “playing out” is going to take a long time. Petroleum has been in large-scale production and use for a long time now — closing in on 150 years if we take the establishment of John D. Rockefeller’s Standard Oil Company as a rough starting point. One would expect it to take a commensurate period of time once resource scarcity begins to bite to descend the right flank of the curve.

    • Indeed but surely part of the argument is about the energy cost of energy and the fact that there is a glut which impacts on price does not affect this. If fifty years ago the energy cost of energy was 3% and it is now say 10% then this is the issue and this is compatible with a glut.

  10. If correct, this would lift the global debt-to-GDP ratio to 235% in 2020, compared with 221% in 2015 and 155% in 2000.

    What’s the big deal of a 14 percentage point increase between 2015 and 2020?

    It appears that there was ~30 percentage point increase in the global debt-to-GDP ratio in US dollars at market exchange rates between 2011 and 2016, led by the emerging market economies.

    Click to access tables_f.pdf

    • Such ratios are indicators but, of course, some countries are viable at far higher ratios than others. One has to question the validity of GDP measures, when “growth” has, in reality, been nothing more than the spending of borrowed money.

      Meanwhile, ZIRP is creating huge additions to unaffordable commitments not classified as debt. The FT recently reported that the deficit in UK pension funds is £945bn, i.e. 52% of GDP. US pension funds are in a similar condition.

  11. If anyone is curious about the credit thing, and has a few weeks to delve, you can go to the original Web source, Doug Noland’s Credit Bubble Bulletin. It will be 18 years old this year.


    It could be another 18 before the stuff hit’s the impeller. I figure at least another $100TN of central bank ‘printing’ and/or magic new money from IMF SDR’s. There cannot be any ‘market’ source for a market dislocation now. An asteroid or massive anarchy, maybe.

    • I wish I could share your relaxed time horizons!

      Over a decade, and at constant values, each $1 of US growth has cost $5 in new debt. Britain has bought each £1 of growth using £7.70 of new debt. Most of Europe (except Germany) has even worse ratios, as has Japan.

      Debt is already so enormous that we cannot afford to pay interest on it – hence ZIRP. Yes, we can go on issuing debt ad infinitum – but at what point does trust in fiat currencies collapse? Personally, I already have little faith in at least two major world currencies.

    • Over a decade, and at constant values, each $1 of US growth has cost $5 in new debt

      No. The U.S. nonfinancial Debt-GDP ratio is 250% not 500%. You are making a fundamental analytic error by deflating the denominator but not the numerator in the Debt (stock)-GDP (flow) ratio.


      So that’s your U.S. debt stock-flow ratio. Here is the U.S. household Asset (stock)-GDP (flow) ratio.


      Since 1980, the Net Worth ratio and the Debt ratio have risen proportionately.

    • I can assure you that I have deflated both. I adjust all figures to the values of a single year (in this instance, 2015) before calculating the changes. If that’s somehow mistaken, do please explain. If one calculates constant-value growth (GDP in 2015 vs GDP in 2005, both at 2015 values) versus debt expansion (debt at 2015 vs debt at 2005, again both at 2015 values), how is that not correct?

      The household asset ratio is, frankly, meaningless. Take property, which is most of it. The value of property is determined by the amount of mortgage finance available. The aggregate value of property is a notional figure, incapable of realisation, not an absolute – whereas debt aggregates are absolutes.

    • I really wish I knew – not only what, but when…

      First, the financial “what happens when….”. We are creating debts that cannot be repaid – indeed, we cannot even afford to pay realistic rates of interest on them, hence ZIRP. We will at some point have gone so far down the “extend and pretend” road that faith in money (and faith is the only foundation of fiat currencies) will disappear. This means the collapse of the financial system.

      Then, the economic “what happens”. Financial collapse, theoretically, is manageable, in that the financial system is an adjunct to the real economy. But the disruption of finance would have drastic knock-on effects on the real economy. Systems could break down. Dmitry Orlov is good on this.

      Next, the social impact. The cost of essentials has risen much more than wages. Job insecurity has increased as well. Monetary policies like ZIRP and QE have, intentionally or not, widened inequalities. Ordinary people already feel conned – especially the young. So society comes under increasing pressure, making Brexit, Trump etc look mild in comparison to what could happen. One American has warned “my fellow billionaires” to beware of “pitchforks”, and that may be prescient advice.

      We go into this with governments perceived as tied to big money, and with faith in economists collectively at new lows (as some are starting to admit).

      This is a cocktail of ingredients that, historically, has often resulted in revolution. I really hope not.

    • Ok I get that the financial status quo is a dead duck. Too much debt. What I don’t really understand is how that translates into a full on collapse of society.

      I guess what i’m trying to say is why can’t there be a debt jubilee, let a load of financial institutions go bust, and start again with a clean financial slate as it were? I mean, we will still have all of our wealth producing industries etc, but after the big reset the newly debt free consumers will have the wherewithal to spur a new economic expansion, no?

    • I see the conundrum, and my own work emphasises the distinction between the “real” and “financial” economies. But I’m as certain as I can be that financial collapse, if it happens, deals a body-blow to society and the real economy.

      International trade would become impossible without letters of credit – and how does a seller in India get paid by a buyer in Germany if the banking system goes down? Fundamentally, who owns what? How can you run a factory or a railway without insurance? What about payment and clearing systems? How does anyone pay his electricity bill if his bank has just gone bust? Our system runs on very stretched and complex lines of communication, including financial communication.

      Dmitry Orlov’s book on the stages of collapse is very good on this…

  12. The household asset ratio is, frankly, meaningless

    All assets are meaningless, right? LOL

    My calcs.

    1. U.S. nominal GDP (date-trillion$).


    2. U.S. nonfinancial debt (date-trillion$)


    The ten year look back. (47003-30191)/(18675-13908)=3.52.

    The 7.25 year look back to the Great Recession trough. (47003-35710)/(18675-14384)=2.63

    Show me your calcs.

    • What I find great about Tim’s blog is that it’s Brit centric. Tim’s line about property assets makes sense here…

    • Marmico, as your list makes clear, you are using nominal numbers. As far as your calculations go, they agree with mine.

      But I am using inflation-adjusted numbers, applying the GDP deflator.


      GDP in 2015: $17,947 (database WEO)
      GDP in 2005: $13,094
      GDP deflator (2015 values): for 2005: 83.8
      GDP in 2005 at 2015 values = $13,094 x (100/83.8) = $15,626
      Therefore growth = $2,321

      Debt in 2015 (BIS): $43,784 (database BIS)
      Debt in 2005: $26,444
      2005 at 2015 values = $26,444 x (100/83.8) = $32,093
      Therefore borrowing = $11,692

      Ratio borrowing/growth = $5.04


    • Assets are not meaningless, but:
      Asset values go up or down with market conditions – debt numbers are fixed.
      Imagine, interest rates rise by 10% on Monday. Property prices might well halve. Bonds would crater.
      Debt numbers stay the same.

      Or: everyone in Britain puts his house up for sale. Millions of sellers – hardly any buyers. Price now?

      My point is that we are comparing a notional number with a fixed one. Tot up all the mortgages and that’s a real number, repayable by contract. Tot up all house values and you have a number that cannot be realised, because the buyers are the people who already own the houses.

      Politicians love aggregate house values (and that alone should tell us something!). Britain, for instance, produces a national balance sheet based on them. It looks healthy – when the reality is very different….

  13. Convinced?

    No. Debt is nominal.

    Sure, asset valuations are variable. The trend is higher. Debt is fixed. The debt-GDP is one of three ratios when comparing stocks-flows. It is stock-flow. It is the best fit for your narrative. It is not the only fit, Compare the debt-asset ratio (stock-stock) and debt servicing ratio (flow-flow).

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