Addictions come in many forms. It's not just substance abuse but behaviours such as obsession or compulsion. It can manifest as excessive shopping and maxing out credit cards with perpetual debt. We are constantly reminded about the dangers of excessive spending and buying on credit. Strangely though, governments don't seem to heed the same advice.
The world is heading towards a debt crisis of immense proportions. Right now, the world's estimated debt is approximately $280 trillion with China as the world's biggest creditor or lender. Countries have also been printing money at an alarming rate, increasingly so since the Covid pandemic hit in 2020. Governments don't print much money these days; it's all done electronically.
The more that governments increase the money supply of a currency, the more that currency devalues. The ultimate effect is inflation. For example, if you have more dollars chasing the same amount of goods and services, it will drive up those items' costs. It's much like more buyers wanting to buy a limited supply of houses; the prices inflate. Countries such as Zimbabwe, Venezuela and Argentina know all too well the folly of such policies.
This chart of the growth in total U.S. debt should be a wake-up call.
Debt To GDP
In the real world if you owe so much money that your assets are less than your liabilities, and if your income cannot cover your debts and costs, you default. It's not a sound way to run your financial life. For some reason, governments seem to think that the rules don't apply to them.
When looking at government debt, the critical statistic is Debt to GDP (Gross Domestic Product). Many countries owe more than what they are producing or earning. Japan is at the top of the list with a 237% ratio. The U.S. is now at 107% while Australia is at 45%. It's why a large economy like Japan's has been lacklustre for at least 20 years.
The U.S. is an example of how debt can spiral out of control. When Obama became President in 2008, the Debt/GDP ratio was 68%. When he left office in 2016, it had shot up to 104%. A slow-growing economy with excessive spending led to this situation. During the first three years of the Trump Presidency, the ratio only went up 2%. Then Covid-19 hit, and in one year it shot up by 34%. Currently, U.S. debt is at $27.5 trillion and rapidly heading to $30 trillion with the latest spending bill that Congress has passed.
Good Debt Vs Bad Debt
When I started my first practice in 1973, I went to the bank and took out a loan to buy equipment. This loan was a good debt because it was to invest in a business that would generate income. When governments invest, however, it is often for frivolous endeavours. However, there are times when debt is a must, such as when the U.S. got involved in World War Two. The massive arms built up was possible because of government printing and borrowing money. Remember the war bonds?
Now we have the Covid-19 debacle. Shutting down of whole economies is unprecedented. Then governments everywhere have desperately borrowed to hand out money to keep people unemployed and businesses unproductive. It's backwards, and we would call this BAD debt.
A Debt Tsunami is Lurking
Unless governments change tack, a tsunami will be upon us. The World Economic Forum looked at six developed countries plus India and China, and found that by 2050 there will be a $400 trillion shortfall in money for retirees! This shortfall is all because of unrestrained spending.
Social security promises made and rising health care costs are the leading cause of budget blowouts and debt accumulation. As the population ages, fewer people are paying taxes, and health care costs continue to go up exponentially. For the U.S., this is especially troubling as per capita spending on health care is the highest in the world––by far.
Incidentally, while the U.S. spends the most on health care, it is 36th in the world in life expectancy. Meanwhile, Japan and Spain which spend almost a quarter the amount are among the top in life expectancy. So obviously, the U.S. is overspending money in that area. As the population ages, and if there are any more senseless wars, you can be sure that there will be a further blowout. In the long term, such spending is unsustainable, and at some point, the system will collapse. If it happens to the U.S., then the whole world will go like a stack of collapsing dominos.
There is a Solution
There is a way to redress the world's debt situation and cure addiction. However, it is something that governments are loathed to do; drastically reduce spending and stimulate growth without printing currencies. Yes, it will necessitate some pain. However, we have seen those specific policies such as lowering tax rates and incentivizing development, stabilize the debt by bringing in more revenue. There is less revenue for the government to collect during recessions with more unemployment and more businesses going bankrupt. Raising taxes only compounds the situation, and devaluating currencies does the same.
Rather than dealing with reality, we hear about fanciful policies such as a Green New Deal and Guaranteed Income for everyone. Such policies are guaranteed to add trillions in debt in a few short years and collapse an economy.
The ultimate solution is to do one essential thing; think carefully about who you vote for in elections. I suggest that unless politicians have their feet put to the fire and act responsibly, don't vote for them. They are spending addicts, using your hard-earned money. Vote for those who will institute policies that put a moratorium on spending, There is little other choice.
Comments