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Global Debt hit $233 Trillion. Will that affect you?

Feb 08, 2018 | Peter Christensen |

Global Debt hit $233 Trillion. Will that affect you?

Global wealth is rising, or is it?

Total global wealth increased by 6.4%, which is the most significant increase since 2012. According to the eighth edition of the Global Wealth Report, total global wealth now amounts to a whopping $280 trillion. However, we should pay very careful attention to how the financial industry defines “wealth”. What they really mean is not wealth, but really assets, and there is big difference.

When you use the term “wealth” for “assets”, you can conveniently discount the debts behind the wealth: If I own a home purchased for $400,000 using a mortgage of $300,000. My asset is worth $400,000, but my wealth is really my asset minus my debt or $100,000. So, instead of being impressed by the trillions of so called wealth, we should make sure to look at net wealth, which is the only measure of wealth.

NET WEALTH = ASSETS – DEBTS

Now it is clearer why the financial sector prefers to focus on assets since they would like you to ignore the fact that global debt is increasing much faster than its wealth. In fact, global debt has reached $233 trillion, an increase of $16 trillion in just nine months—more than total US GDP!

It’s true that global wealth surged in 2017. But it’s just as true that global debt jumped even higher. And let’s look at the development over the past 20 years:

Since the late 1990s, we have witnessed an increase in global debt from $50 trillion to $233 trillion while global wealth grew from $120 trillion to $280 trillion. In other words, global debt increased by 366% while global wealth increased by only 133%. And net wealth has dropped from $70 trillion to $47 trillion—that’s a decline of almost 33%!

The above chart clearly demonstrates the trend that has marked the global economy over the past 20 years. We are going broke.

What makes this worse is the fact that the debt mentioned is only the debt that has been reported. For instance, it doesn’t account for Foreign Exchange Swaps (a short-term debt instrument that is believed to be at least $13 trillion). Let’s not think about how that affects the equation…

What are the dangers of rising debt?

No one knows how much debt, globally, is too much debt. However, history shows that high debt is associated with weakened economic growth. So, the debt that is accumulating across the world is dampening economic growth while increasing the risk of defaults, crashes, and other crises.

The problem that is facing world leaders is the fact that we need more debt (both government and private spending) to boost the economy. And increased debt means higher risks of triggering a financial crisis like the one we saw about a decade ago—which we are still recovering from.

The warning signs are there, and luckily some are watching. Chief economist at the IMF, Olivier Blanchard, has stated, “The post-crisis world is a world of high debt, and it doesn’t take much. It just takes a bad shock for the debt dynamics to go wrong.”

The financial sector played a big role in the crash in 2008, and it’s evident that it’s role in the global economy is important, yet comes with risks. Today, global markets are more intertwined than ever, and a wrong move in one end of the world can affect economies in the other end. Examples include Greece’s effect on Europe and the Lehman Bros. collapse in 2008, which played a role in kickstarting the global financial crisis.

How will the rising debt affect you?

A look at the US budget shows that we’re on a dangerous path: Spending and debt are both frighteningly high, and it doesn’t look like either is going to slow down, in part because of increasing entitlement spending and the recent tax cuts.

Advanced economies like the US economy may experience significant and long-lasting impaired economic growth when public debt reaches 90% of GDP, according to research. And the US has passed this threshold. In those situations, interest rates will be increased in order to reduce private investment and raise inflation.

If that happens, the implications will be significant for all Americans, especially the poor, the elderly, and the middle class. In times like those, precious metals have proven their value in protecting our wealth. That is why Bridgewater, the world’s largest hedge fund, which makes its income mostly from stock market related assets, has recently recommended its clients to invest a portion of their portfolio in gold – http://goldalliancecapital.com/worlds-largest-hedge-fund-advises-to-invest-in-gold/ . When someone who is traditionally against gold, makes this kind of recommendation, make sure to take their recommendation to heart.