What few economists understand is the nature of money. According to the Bank of England, the truth is the vast majority (somewhere between 80-98% of what we count as money) “is created, not by printing presses at the central bank, but by banks when they provide loans.” That means whenever you take out a mortgage, student loan, car loan, line of credit or maintain a credit card balance you are effectively creating new money as private banks issue you credit or loans. These loans are literally created out of thin-air; simply said: every loan that is created is simply a book keeping entry in a spreadsheet. Governments also create debt money when they sell bonds to finance operating deficits, which they then sell to the financial markets paying the markets interest on those bonds. Businesses also take out loans as well as financial institutions. Finally, debt instruments are also purchased by foreigners that makes up so-called foreign debt. The sum total of all of this debt money creation through credit, loans and bonds represents the total money supply of a nation.
Simply said: money IS DEBT.
You might ask: so what is the problem with money as debt?
The problem is that the total amount of debt in an economy keeps growing exponentially and in the US has doubled every 7-8 years since 1945.
The following graph shows the growing levels of total debt in the US since the end of World War II. What is important to note is the year 1971 when President Nixon removed the US dollar from gold. Between 1933 and 1971 the US dollar was linked to gold which meant the total debt to GDP ratio (1950-1970) was very stable averaging 146%. That ratio has been rising ever since and is now 362% of GDP as of 2019.
The above graph shows the relationship between US debt and GDP showing the explosion of debt money relative to GDP after 1971. Total US debt from all sources has now increased by nearly 8,000% since 1945 incurring every increasing amounts of interest charges on total debts which can never be repaid. You will notice the only time in the past 75 years when debts did not grow was just after the 2008 financial crisis for roughly 5-6 quarters.
Both financial experts Robert Kiyosaki and hedge fund master Ray Dalio both understand that we are facing a potential catastrophic explosion of the debt ballon. When Kiyosaki was asked ‘what keeps you awake at night?’ he said “thinking about the economy and the debt balloon.’ When will the game of musical debt chairs end? Will the next wave of a new pandemic burst the balloon for good? The debt balloon is not unique to the US; all other nations have similar astronomical total debt to GDP ratios.
Compared with the current US debt to GDP ratio of 362%, the most indebted EU countries (both private and public debt) are Luxembourg 496% debt:GDP ratio, Ireland (414%), Portugal (368%), and France (351%). Germany has the lowest ratio at 216%.
The UK has a 310.8% debt to GDP ratio broken down by 86.8% government debt and 224% private debt to GDP.
Canada is equally bad at 356% of debt:GDP ratio of broken down into 266% from private (household/non-financial corporations) debt and 90% government debt (federal, provincial and municipal).
Will the Added Debt Costs Associated with Covid-19 Burst the Balloon?
As the government debts mount to pay for the economic impacts on all Canadians and Americans of a Covid -19 pandemic depression the hidden costs of interest payments on both government and household debts on Canadian and American households will grow exponentially.
Before Covid the Canadian federal government debt stood at $750 billion and provincial government debts total $1,016 billion. In the US federal debt were in excess of $19 trillion with state/municipal debt exceeding $3.1 trillion. US business sector debt exceeded $16.8 trillion and financial sector debt totalled $17.6 trillion.
In Canada, the combined federal and provincial governments debt are estimated to incur annual interest costs of $55 billion or the equivalent of $3,900 per Canadian household or 6.3% of median after-tax household income in 2019.
These figures are much higher in the US with federal debt amounting to $153,517 per US household. Precise estimates on the exact interest costs of the federal and state debts are not readily available. Current US budget figures suggest ‘net interest charges; of only $356 billion which suggest debt servicing rates of a mere 1.81%. These figures seem improbably too low but cannot be verified without more forensic accounting on both federal and state debt instruments outstanding.
As of May 31, Ottawa estimated that overall total cost of the Covid economic impacts on Canada — including measures to protect Canadians health and safety and to provide business and tax liquidity support as well as the direct support for individuals, businesses and sectors — amounts to more than $929.7 billion.
How much of this total will be debt financed is not yet clear as the costs continue to mount for both federal and provincial governments. Some economists estimate of Covid economic bailout costs exceed $400 billion. This debt will be raised primarily by selling government ‘pandemic’ bonds to the markets adding more interest costs to Canadians imbedded in our taxes and costs of living.
In addition, the interest costs associated with household mortgage and non-mortgage (credit card debt, car loans, student loans, lines of credit) which totaled $2.172 trillion in 2019 are estimated by StatsCan at $335.6 billion. This amounts to an average of $23,773 in interest costs per every Canadian household or 38% of median after-tax household income of Canadians.
Therefore the interest payments on government debts plus Canadian household debts amounts the equivalent value of 45.6% of median-after tax income in 2019.
If we now add the estimates of debt servicing costs associated with Canadian private business sector and financial institution debt, along with non-profit enterprises, we add another $15,649 in interest charges per Canadian household. This means private-business/financial sector debt servicing represents an additional 25.5% of median after-tax household income. While these interest charges are associated with non-household and non-government debt these costs ultimately find themselves imbedded in the price of all goods and services in the total economy thus impacting households directly.
The bottom line for the average Canadian household in 2019 is that interest costs associated with household, government and private sector debt total roughly $43,321 which represents 70.6 % of median after tax income of $61,400 in 2019. These are staggering figures!
The US situation is similar to Canada. My rough estimates of the interest charges associated with the $77.8 trillion in debt suggests that the interest charges equal about $30,617 per average American household. This means that in 2019 with median household income of $63,030 that the interest cost burden on the average household would have been 48.6% on all debts (federal/state, household, business, foreign). This 48.6% breaks down to: a) 13.0% coming from household debt (mortgages, credit cards, etc), b) 11.7% associated with all government debt (fed/state) and c) 23.9% associated with business, financial sector and foreign debt). However, my mortgage debt cost estimates are likely too conservative; using Statistics Canada analytic approach US household debts are likely similar to Canadian households which would suggest US households debt service charges could be as high as 38% of median household income. This would push the total estimated interest cost burden on US households to a staggering $47,674 or 75.6% of median US household income. These are seemingly improbable numbers yet there are no official interest cost estimates that are reported.
US total debt have grown exponentially from $343 billion in 1946 to over $77 trillion in 2020 1Q as per the following graph exacting an ever larger interest cost burden on American households that virtually everyone does not realize. This amounts to a staggering per household debt increase of 8,697% from $2,607 per capita in 1945 to $229,347 per capita, with no end in sight as debts continue to compound, doubling every 7-8 years.
The most recent US estimates suggest that the cost of Covid in terms of additional federal government debt will be at least $3.5 trillion pushing federal government debt close to $24 trillion and pushing total US debt from all sources well past $80 trillion (which does not include the additional debts incurred by households, businesses, and financial institutions due to the pandemic. The vast majority of this new federal debt will be sold as ‘Covid’ bonds to the private markets; even at record low interest rates or bond yield rates, this will increase the debt and interest burden on all Americans.
As Canadians and Americans try to cope with the next wave of fear and chaos, we are unaware of the economic oxygen being slowly squeezed from our household economic well-being through the silent killer of debt money.
We are literally drowning in debt and there’s no way out of this economic dark age except for ever increasing and compounding mountains of debt and forever rising levels of interest costs us a hidden ‘carbon monoxide’ killer of household wellbeing.
You might ask how can the world survive the explosion of the global debt balloon? When will it happen? Is the debt balloon akin to a giant hydrogen Hindenburg explosion or like giant Humpty Dumpy falling off the wall?
Are there new alternative systems of money that don’t use debt money balloons to inflate GDP growth? Can we replace private bank debt money systems with public banking systems and adopt clean slate or Jubilee debt forgiveness laws like ancient Sumeria and Babylon, later adopted by ancient Israel?
These are topics I’ll address in my next article…. stay tuned.