http://images.google.ie/imgres?imgurl=http://www.mybudget360.com/wp-content/uploads/2009/11/global-debt-total.png&imgrefurl=http://www.mybudget360.com/american-financial-dream-deferred-how-the-us-is-mirroring-the-japanese-lost-de Source: Societe Generale By 2011 global economies will have close to $45 trillion in debt. The U.S. already broke the $12 trillion mark.
The reason that the increasing debts have not stimulated the US economy recently is that the borrowing has been used form spending on assets rather than activities which generate employment directly. Only a small part of a debt taken on to purchase, say, an existing house, goes to someone who will spend it as income. The lawyers and the real estate agents who handled the sale will gain a small part of the purchase price as income income but almost no-one else.
The money that was created when it was loaned to buy assets pushed asset prices up in relation to the income available to support those prices. The market value of shares rose to around three times their average historical value in the US.
Despite heavy demand and rising prices, world crude oil production remained on a plateau for four years, largely because of resource constraints.
Slow economic growth and recessions tend to occur in the US when petroleum expenditures reach about 5 or 6% of GDP. Rapid increases in the price of oil leads to rapid increases in the percent of GDP spent on petroleum which is followed by a slowing of economic growth, i.e. a recession. http://netenergy.theoildrum.com/node/5304#more This relation seems to be consistent for the major recessions but not for the minor recessions that occurred in 1990 – 1991 and 2001.
The debt carried by the British economy has increased by 250% since 1987. Most of the increase has come from the financial sector.
The debt burden has become so great that the flow of grounded money is no longer able to maintain the values backing the stratospheric money.
The smaller banks in the US are in more serious difficulties than the bigger ones. 19 closed in March 2010.
This chart from the Financial Times at the end of February 2010 shows the extent of the banking debts for which European govts. have made themselves responsible by extending guarantees. Many of these governments will not have the resources to meet their obligations when bad debts and the fall in asset values makes “too big to fail” banks insolvent.
These estimates, produced before the 2008 crash, are for the rate at which global oil production might decline. The Hedberg estimate was produced by a group of senior oil industry figures. Robelius is a Dutch researcher.
The impending contraction in the energy supply means that incomes will fall rather than rise, making it impossible to support current asset values and borrowing levels. Economic growth will not come to the rescue this time.
Collapse and stabilisation instead of degrowth?
Collapse and stabilisation
instead of degrowth?
Why the global debt burden means there will be no recovery
Feasta, Foundation for the Economics of Sustainability
The debt problem...
Debt presents a serious problem for de-growth
The share of national income required to service it
grows as the economy shrinks
A way to reduce debt is therefore an essential part of
any de-growth strategy.
Massive debt write-downs seem inevitable in the near
future as a result of an economic collapse.
The collapse will give the de-growth we want. Our task
will be to stop the pro-growth systems being restored
Some countries' debt has become unsupportable
Why debts and asset values rose so much
There are two types of money – stratospheric
and grounded – disguised as one
Banks created lots of stratospheric money by
lending against assets.
Grounded money also became stratospheric
money when it was used for buying energy and
other commodities at the height of the boom
and the producers could not spend it all back
with their customers.
Debt has not been stimulating the US economy
For four years, world oil production was on a near plateau
Relationship between spending on oil as a
percentage of US GDP and economic activity.
British debt growth since 1987 – mostly financial
Small (under $300 m assets) US banks in big trouble
• The green curve shows the
drop in the proportion of
'healthy' loans by small US
banks from about 80% in
2005 to under 43% today,
the lowest on record.
• The blue line is the growth
in the % of non-performing
loans to total loans. At 3% it
is the highest for 20 years
Poor prospects of a real return
• Global situation (2009)
• Debt plus stock market value equals 345% of global product.
6.9% real growth required to give 2% real return
• German situation (2009)
• Total debt plus stock market value is about 560% of GDP .
5.6% real growth required annually to give 1% real return.
• US situation (2009)
• Total debt plus stock market value is about 505% of GDP. 5%
real growth required annual for a 1% real return.
• Source: Hannes Kunz, IIER
Injecting debt-based money into an economy adds to the
debt burden so it needs to be spent in a way which
increases incomes rather than asset values. A better
solution would be to
Create non-debt money by quantitative easing
Give it to everyone equally to pay off debts
Those without debt could spend
This would boost demand, lower unemployment and
boost taxes. And cause inflation, which would raise
incomes in relation to debt.
The banks go bust. Everyone's deposits are lost. Riots
Asset values plunge to near-nothing.
Trade breaks down. Russian barter companies thrive
but most people are unemployed.
Social welfare payments and pensions become distant
memories. Many are cold and hungry. Some starve.
Attempts are made to establish new money systems.
Further de-growth is unattractive. Everyone wants the
abundant life they enjoyed “before”.
A longer-term solution
Have two types of money, one for spending, the other
for saving, with a variable exchange rate between
Saving the spending currency would be discouraged,
perhaps by inflation, perhaps by demurrage.
Would-be savers would convert their spending
currency to the saving one at the current rate of
Anyone selling an asset would be paid in the savings
currency and have to convert it to the spending
currency if they wanted to use the payment as income.