This $233 Trillion Bomb Is Set to Blow

It’s impossible to read the headlines or view a financial news channel without hearing about the debt crisis.

We hear that the U.S. is facing a debt crisis because budget deficits are out of control. We hear that China is facing a debt crisis because of wasted infrastructure investment, bank Ponzi schemes and bad loans to money-losing state-sponsored enterprises.

Next we hear that emerging markets are facing a separate debt crisis because of dollar-denominated debt that cannot be repaid if higher U.S. interest rates lead to a stronger dollar.

In short, the whole world seems to be facing a debt crisis in various forms. But just how bad is it overall?

Total global debt now exceeds $233 trillion. Another way to express that figure is about a quarter quadrillion dollars (a quadrillion is 1,000 trillion). The global debt-to-GDP ratio is about 318%, a dangerously high level, especially if interest rates start to rise.

This debt is in addition to approximately $750 trillion of bank derivatives as reported by the Bank for International Settlements (BIS).

Adding the debt and derivatives together produces over $1 quadrillion of financial obligations of various kinds. This is far more that the amount of debt and derivatives outstanding before the last financial crisis in 2008.

That fact alone means that the next financial crisis will be exponentially greater than the last one. Regulators won’t admit this and investors are unprepared for it, but it’s true.

How bad is America’s debt problem in particular?

It’s difficult to get economists to agree on anything, but in this rare instance five prominent economists are in total agreement.

Unfortunately, the issue they agree on is that the U.S. is going broke.

Michael Boskin, John Cochrane, John Cogan, George Schultz and John Taylor wrote an Op-Ed published in TheWashington Post.

Schultz was Treasury secretary for President Nixon. Boskin was chairman of the Council of Economic Advisors for President Bush 41. John Taylor was on the short list to be chairman of the Fed before President Trump settled on Jay Powell. Cochrane and Cogan have highly distinguished academic careers, as do the others.

In short, this is an “A list” of top-tier economists.

What they agree on is that the U.S. is heading quickly toward $1 trillion annual deficits, probably by next year, and that these deficits will continue at that level as far as the eye can see.

They also warn that government debt will increase by $5 trillion in the next few years on top of the $20 trillion already outstanding. Higher interest on the debt will just add to the burden.

These are the warnings not of a fringe doomsday blogger but of the establishment itself. My own estimate is that the actual debt and deficit numbers will be worse than these projections, pushing the U.S. closer toward a true crisis of confidence in the dollar.

This path is unsustainable. Something has to give — and probably sooner rather than later.


Jim Rickards
for The Daily Reckoning

The Daily Reckoning