By George Noga
(To Finance the Coming US and Global Debt Bomb)
Seriously! The world’s money supply is finite and we are burning through it. And when it’s gone, it’s gone.
The US and advanced economies must rely on emerging economies to finance their binge borrowing. Between now and 2020 emerging economies must quadruple their share of advanced economy debt to feed the beast. They may be unwilling to do so.
More to the point: even if they fork over the money, there simply may not be enough anywhere on planet earth. Note: Those with but a tenuous grip on economics may think we could just print more money. But that simply inflates; there is only so much real money.
“To many folks, the notion of the world running out of money simply doesn’t compute, but it most assuredly can happen.”
Until very recently I never gave this matter serious thought because I assumed people (and nations) would quit lending to the US and other profligate nations well before the world ran out of money.
Upon analyzing the research on this issue however, two critical new dimensions are added to the debt crisis: (1) will the world really run out of money; and (2) will it happen before people quit lending to debt-bomb nations for other reasons. To many, the notion of the world running out of money doesn’t compute – but it most assuredly can happen. Let’s begin by reviewing some basic data.
Gross debt as a share of GDP in 2011 for select economies is: Japan 204%, Greece 130%, Italy 130%, USA 100%, France 100%, UK 94%, Germany 85% and Austria, Netherlands, Portugal, Spain and Austria all between 75% and 85%. The Gross World Product or (“GWP”) was $60 trillion in 2010 and is projected to be $74 trillion in 2015 and $82 trillion in 2020. Gross debt for those same periods is $34, $48 and $64 trillion respectively. Simple division reveals the Debt/GWP ratios to be 59% in 2011, 65% in 2015 and 78% by 2020. (The source is IMF data through 2015.)
“The movies got it all wrong; it’s not space aliens,
pandemics or even nuclear winter that does us in;
in the end the planet simply runs out of money.”
The studies I read use CBO data for the US economy through 2020. MLLG readers know from prior blog posts that CBO data are uber-optimistic. The real Debt/GWP ratio in 2020 therefore likely will be between 90% and 100% – dangerous territory by anyone’s reckoning. However, the Debt/GWP ratio masks serious differences between advanced economies and emerging ones. The advanced economies should be 125-135% which makes it far worse.
All the movies got it wrong; it’s not going to be space aliens, pandemics or nuclear winter that does us in; at the end the world simply runs out of money. I must note some significant caveats. There are many variables and they interact in complex ways. In particular, the level of interest rates, differences in rates, crowding out of non-government capital and willingness of foreigners to lend will be crucial.
Back to the Question: Is There Enough Money in the World?
Before revealing my thoughts, I’ll provide the conclusions verbatim from the academic, think tank and government studies. The Brookings study concludes, “Our analysis paints a sobering picture of worsening public debt dynamics and a sharply rising debt burden. . . But perhaps the worst is yet to come. . . In the absence of decisive action, ballooning public debt could become a major threat to domestic and global stability.”
The main source of information herein is a study published by the University of Wisconsin entitled “Financing U.S. Debt: Is There Enough Money in the World – and at What Cost? by John Kitchen of the US Treasury Department and Professor of Economics Menzie Chinn. They conclude: “There would be enough money in the world over the intermediate horizon (to 2020). Uncertainty remains however whether the world would, in fact, accommodate higher shares of US assets. Further such an expansion has limits that ultimately could not be sustained . . . beyond the intermediate horizon considered here.”
Exactly what does this mean in plain language? The authors of the studies believe: (1) it is possible for the world to fund US and other deficits to 2020; (2) it is not certain they either can or will do so; and (3) the world will run out of money soon after 2020. Following is my take.
“Markets will react long before the US borrows
the last dollar available in the universe.”
1. The studies cited herein are using overly optimistic IMF and CBO data. The situation will be much worse than the studies portray in 2020.
2. A ratio of Debt/GWP of 90% (120+% in developed countries) in 2020 is at the outer limit of what can be financed by the entire planet. We are facing terra incognita.
3. To finance US deficits to 2020 requires emerging nations to quadruple thier share of US debt instruments. This stretches the world’s money supply about as far as it can go.
4. By 2020 the world will be out of money and unable and/or unwilling to finance any further debt by the US and other profligate nations – or any nations for that matter.
5. Even if perchance the rest of the world were willing to finance US deficits past 2020 they will be unable to do so because there simply won’t be any money left.
6. A crisis is likely before 2020 as it will be apparent the debt is unsustainable. Markets will react long before the US borrows the last dollar in the universe.
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