Best of the Week
Most Popular
1.Bitcoin War Begins – Bitcoin Cash Rises 50% While Bitcoin Drops $1,000 In 24 Hours - Jeff_Berwick
2.Fragile Stock Market Bull in a China Shop -James_Quinn
3.Sheffield Leafy Suburbs Tree Felling's Triggering House Prices CRASH! - Nadeem_Walayat
4.Bank of England Hikes UK Interest Rates 100%, Reversing BREXIT PANIC Cut! - Nadeem_Walayat
5.Government Finances and Gold - Cautionary Tale told in Four Charts - Michael_J_Kosares
6.Gold Stocks Winter Rally - Zeal_LLC
7.The Stock Market- From Here to Infinity? - Plunger
8.Ethereum (ETH/USD) – bullish breakout of large symmetrical triangle looks to be getting closer - MarketsToday
9.Electronic Gold: The Deep State’s Corrupt Threat to Human Prosperity and Freedom - Stewart_Dougherty
10.Finally, The Fall Of The House Of Saud - Jim_Willie_CB
Last 7 days
Gold Bullish on US Fed Interest Rate Hike - 16th Dec 17
The LORAX Explains What Happened to Sheffield's Street Trees 2017 - 16th Dec 17
Bitcoin Trading Alert: Bitcoin Pauses – Will Appreciation Follow? - 16th Dec 17
SanDisk Ultra 128gb 100mbs Micro SD Card for Smartphone's Speed Test - 15th Dec 17
Inflation is Spiking Globally… Bond Bubble Bursts in 3… 2… - 15th Dec 17
Sheffield's 'Real' LORAX Defending the Trees From the Labour City Council Patrol Units - 15th Dec 17
Stock Market Decline Signals are Near - 15th Dec 17
Santa Is Putting Christmas On The Blockchain And Saving Billions - 14th Dec 17
The Unprotected, the Protected, the Vulnerably Protected Classes—Which Are You? - 14th Dec 17
Gold’s Upside Target - 14th Dec 17
Year-end US Interest Rate Hike Again Proves To Be Launchpad For Gold Price - 14th Dec 17
2 Charts That Might Define the Fed’s Jerome Powell Era - 13th Dec 17
UK Stagflation Risk As Inflation Hits 3.1% and House Prices Fall - 13th Dec 17
Stock Market Elliott Wave Forecasts - Is the World coming to the end? - 13th Dec 17
A Method Traders Can Use to Confirm an Elliott Wave Count - 13th Dec 17
Best Time / Month of Year to BUY a USED Car is DECEMBER, UK Analysis - 13th Dec 17
A Former Wall Street Veteran: Good Traders Are Born, Not Trained - 12th Dec 17
Buy Gold, Silver Time After Speculators Reduce Longs and Banks Reduce Shorts to Continue? - 12th Dec 17
Masters of Economic and Political Illusion – in Taxes, Debt, Government, and Markets - 12th Dec 17
Approved Used Land Rover Main Dealer Real Customer Buying Guide - Hunters, Chester - 12th Dec 17
Gold Price 100% Bullish Signal - 12th Dec 17
Epic Stock Market & Fixed Income Bubble Will Not End Well - 12th Dec 17
Bitcoin can be stolen. Although Can’t be hacked - 11th Dec 17
Have Stocks Reached A Permanently Rigged Plateau? - 11th Dec 17
Trying To Beat The System Is A Fatally Flawed Investment Strategy - 11th Dec 17
Is This The Beginning Of The Next Silver Rush? - 11th Dec 17
The Dow Gold Ratio - 11th Dec 17
Evidence of a Stock Market Top Mounting - 10th Dec 17
Bitcoin Doesn’t Exist – Forks and Mad Max - 10th Dec 17
Bitcoin Doesn’t Exist – Putting the Banks Out of Business - 9th Dec 17
China’s Struggle for Market Economy Status - 9th Dec 17
Is Gold Really Strong? - 9th Dec 17
Bitcoin Parabolic Mania - 8th Dec 17
SPX Make a 61.8% Retracement - 8th Dec 17
Gold, Stocks and Bonds - The 3 Amigos Update - 8th Dec 17
Gold Stocks Break, Gold to Follow - 8th Dec 17
4 Charts That Show How Trump Tax Cuts Will Trigger A Recession - 8th Dec 17
Precious Metals Breaking Down! 3 Amigos to Abort? 4 Horsemen to Ride? - 7th Dec 17
Bitcoin Just Smashed Through $12k… Wait, $13k… Now $14k… This Is Getting Ridiculous! - 7th Dec 17
Stock Market Tops Look Like This - 7th Dec 17
Crude Oil, Oil Stocks and Invalidation of Breakouts - 7th Dec 17
Bitcoin Doesn’t Exist – 2 - 7th Dec 17

Market Oracle FREE Newsletter

Traders Workshop

Brace Yourself for The Debt Great Reset

Interest-Rates / Global Debt Crisis 2017 Jun 01, 2017 - 02:55 PM GMT

By: John_Mauldin

Interest-Rates

We are coming to a period I call “the Great Reset.”

As it hits, we will have to deal with the largest twin bubbles in the history of the world. One of those bubbles is global debt, especially government debt. The other is the even larger bubble of government promises.

These promises add up to hundreds of trillions of dollars. That’s vastly larger than global GDP.

These are real problems we must face. It will mean forging a new social contract. It will also require changes to taxes and the economy. I believe that within the next 5–10 years, we have to end the debt and government promises.


What I mean by government promises are pensions and healthcare benefits. Governments assumed that taxes would cover their immediate costs. They thought future politicians would figure out the rest. Now the time is nearing when those “future politicians” are elected.

This Is the Worst Recovery Ever

After a big recession, debt is usually reduced. That is what many expected in 2009. Individuals in some countries did reduce their debts. That is what happened in the US. But governments and corporations did not reduce their debt.

As of 2014, total global debt rose to $199 trillion. It grew $57 trillion in just the previous seven years. That’s about $8 trillion a year.

The McKinsey Institute chart below shows how debt is split within the countries that make up the bulk of the world economy.

Source: McKinsey Global Institute

The debt-to-GDP ratio increased in all advanced economies from 2007 through 2014. And the trend is continuing:

Source: McKinsey Global Institute

And Things Are Getting Worse

After that 2014 report and through 3Q 2016, global debt rose by $17 trillion.

In fact, in just the first nine months of 2016, global debt rose $11 trillion. The average change from 2007 through 2014 was a little over $8 trillion per year. Global debt-to-GDP is now 325%, though it varies sharply by region and country.

Even worse, interest rates are slowly rising. As they do, so too does the cost of debt. In the US, according to my friend Terry Savage:

Interest on the national debt is the third largest component of our annual Federal budget—after social programs and military spending. In the most recent fiscal year, we paid $240 billion in interest on the national debt.

Now, with the Fed hiking rates, interest costs are set to soar. The Congressional Budget Office estimates that every percentage point hike in rates will cost $1.6 trillion over the next ten years!

That 1% rate hike will take roughly 3% more of our taxes every year. Governments must cover this with additional taxes, lower spending, or an increase in the deficit. If they increase deficits, there will be even more total debt and interest rate cost. And of course higher interest rates affect those of us who have mortgages and loans with floating interest rates.

And it is not just the US that faces a grave debt problem. Global GDP is roughly $80 trillion. If interest rates were to rise just 1%, $2 trillion more would go to pay that debt increase. That is about 1.5% of global GDP.

Repaying that debt requires either reduced future spending or some kind of debt liquidation. Those are the only options.

Hard Choices Will Bring Turmoil

Sometime this year, world public and private debt plus unfunded pensions will surpass $300 trillion. That is not even counting the $100 trillion in US government unfunded liabilities. Oops.

A time is coming when people will realize that these cannot be met. Will voters decide to tax “the rich” more? Will they increase their VAT rates and further slow growth? Will they reduce benefits?

No matter what, hard choices will bring political and market turmoil.

Get a Bird’s-Eye View of the Economy with John Mauldin’s Thoughts from the Frontline

This wildly popular newsletter by celebrated economic commentator, John Mauldin, is a must-read for informed investors who want to go beyond the mainstream media hype and find out about the trends and traps to watch out for. Join hundreds of thousands of fans worldwide, as John uncovers macroeconomic truths in Thoughts from the Frontline. Get it free in your inbox every Monday.

John Mauldin Archive

© 2005-2018 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

Catching a Falling Financial Knife