Sunday, 20 September 2015

Global Debt

"global debt has grown by $57 trillion since 2007, according to McKinsey and Company. Global debt is now 286% of global GDP." is quoted in Money Morning.

Surely this has to be bollocks. Global debt has to be zero, because for every debtor, there has to be a creditor, somewhere, and the two must cancel each other out. Unless, of course, it means that global credit is also 286% of global GDP, in which case it is a meaningless statistic. If A went out and borrowed $1 billion from B, B borrowed $1 billion from C and C then borrowed the first $1 billion from A, global debt would have gone up by $3 billion without any money actually changing hands.

Or am I missing something?


Random said...

You are not meant to think about Bayard. We were immoral didn't live within our means are drowning in debt! WE ARE GOING TO DIE YOU DON'T WANNA BE GREECE!!!?.

Demetrius said...

Leverage? Given the complexity of international finance, notably in the trading sectors it is like that out there the amount of debt created is vastly greater than the real credit or asset basis from which it originates. So it does not take much to go wrong for systemic risk to produce a crash. The bigger the leverage the bigger the crash and these days the effect can be compound.

Anonymous said...

Yes, you are missing "balance sheet effects".

Debt affects debtor behaviour, and credit affects creditor behaviour, in different ways.

So the absolute global amount of gross debt and gross credit matters, even if *arithmetically* they cancel each other out.

M Pettis in his book "The volatility machine" explains better.

Mark Wadsworth said...

Agreed. I have been saying this for years. It would be more correct to say "indebtedness" than just "debts",

Dem, clearly not true. There is a whole pyramid of debt, starting with liar loans in the USA. If they can't pay, the bank has to write the loans down. So the bank's creditors write down the value of the bank bonds they hold (they are and were trading significantly below par) and so the total debts owed by some and the amounts receivable by others always net off to zero.

Imagine all those liar loan borrower all got good jobs and paid off their mortgages and the banks took the money and redeemed all their bonds..?

Bliss, yes, all this leverage transfer wealth from some people to others (banks and landowners).

Bayard said...

R, yes that is what I suspect, the value of the statistic lies purely in its scare factor, although see b's point below. As to Greece, who will really lose out when Greece defaults, that is the question. I dare say we will never know, even after it has happened.

D, I am not so worried about the lack of collateral. In my slightly specious circular example, even if there was collateral to start with, once the circle is formed, it is no longer required. Whether the debt is secured or unsecured is a whole different ball game.

b, agreed, even if a large part of the debt is phoney debt, like my illustration.

Derek said...

That $57 trillion debt will be balanced by the creation of $57 trillion of new money, so not as scary as it sounds. Still scary though because the bigger the debt the more money is being destroyed by repayment. Which money has to be replaced by new credit money from yet more bank loans or new government money from bigger government deficits if we want to avoid recession.

Bayard said...

D, so the danger is not that the debtors might not be able to pay back the debts, which is what we tend to think when we see such a large figure, but that the debtors might start to pay it back.

Derek said...

Actually, yes. Believe it or not that is a big danger. Here's why.

Thing is that when the subject of debt comes up we tend to think of personal debts like the A owes B owes C owes A example. Those sort of debts are relatively harmless because they neither create nor destroy money; they just change who has it at any given time. So paying one of those back is harmless; not paying it back is possibly disastrous to whoever doesn't get the money back but the money is still around. Somewhere. Somebody's got it.

The really scary debts are the "split the zero" type of debts which we were talking about the other day because those debts create money when they are taken out and destroy it when they are paid back. Let me repeat that. Debts created by banks are not like personal debts. When bank loans are paid back, money is destroyed. Nobody has it any more. Not even the bank that you gave it to. The principal part of the money is just balanced off against a debt, and they both vanish with the flick of an accountant's wrist in a feat of double-entry book-keeping. Leaving the debtor with less debt and the bank with more interest. And everyone else with less money. The more bank debt there is, the more money is being destroyed on a daily basis. That's why private debt is a huge problem right now. And the bigger the private debt, the bigger the problem.

Mark Wadsworth said...

D, I am going to have to disagree here.

Money is not a thing, it is a unit of measurement, and as something cannot measure itself, for these purposes it is a unit of measurement of indebtedness.

So splitting the zero does not create "money" in any real sense, it just creates/records indebtedness. There is no extra 'money' to flow around because the depositor's gain is the borrower's loss.

So when the zero re-establishes itself, no "money" has been destroyed either.

Bayard said...

Mark, I don't think your argument stacks up. In my example above, before the process started, there was no indebtedness, nothing to measure and therefore no "money". After it had finished there was $3bn of indebtedness and therefore, according to you, $3bn of "money". If A,B and C get together, realise they all owe each other the same amount and agree to cancel the debts we are back to where we started, with no indebtedness and no "money". So $3bn of indebtedness has disappeared into the thin air from whence it came, or, you could say, $3bn in money has been destroyed.

Obviously it's not that simple in real life and we have the problem of liquidity, but it must be true that, if increasing indebtedness, i.e. "creating money" produces inflation, then you cannot decrease indebtedness without producing the opposite, i.e. deflation.

Dinero said...

Deposit creation does create money to flow around , the benefactors of the loan records are transferable between bank customers, recorded as deposit credits. As more deposits are created their is more to flow around.

Derek said...

I realise that it's one of the very few economic areas where we do disagree a bit, Mark. And I am quite happy to agree that a monetary unit is a unit of indebtedness. But I also find it very useful for my own understanding to see the physical money tokens (or their virtual banking credit equivalents) as "the thing owed" because it makes it easier for me to think about the situation clearly when linking the monetary economy to the physical economy.

Derek said...

Agreed, Bayard. Especially your last paragraph.

Bayard said...

Re my last paragraph, is the government printing money a la Weimar Republic in reality "splitting the zero" with itself as the debtor and the receivers of the newly printed money as the creditors?

Mark Wadsworth said...

B, yes, printing money is splitting the zero, same thing.

Derek said...

In my opinion "Splitting the zero" is a good way of summing up how the banks operate because they create a debit and a credit (debt and money) for each borrower at the same time. So each borrower goes from having zero to having say, £1,000 of debt and $1,000 of cash. Which is still zero in the bigger picture for both the borrower and the lander.

It's trickier to apply it to governments. The way that things are set up right now, the Treasury can borrow money from the Bank of England at zero interest if it wants to. That would be splitting the zero. But as Mark has often pointed out, the Treasury and the BoE are just different departments of the government, so the government is both the creditor and the debtor and essentially owes itself the newly created money. This will not stop it from giving that money to any third party it wants, either as a hand-out or as payment for goods and services rendered, once it has been created.

And at that point we might run into Weimar-type inflation problems, if the government doesn't ensure that it creates enough tax debt to cancel any extra money that's not being destroyed by global private debt repayments in the way I described earlier.

Random said...

"And at that point we might run into Weimar-type inflation problems,"
You can run into inflation problems, but not Weimar style.
Weimar's problems were the onerous foreign debt and reparations in the Versailles Treaty and the loss of productive capacity after the war.
"This will not stop it from giving that money to any third party it wants, either as a hand-out or as payment for goods and services rendered, once it has been created."
Nothing stops it from doing that now.
Voters hate inflation. Unless it is land price inflation ;)

Random said...

Derek, remember there is building up savings as well as paying back.
And running down/spending savings and bank lending.
This is the "net saving" that MMT talks about.
If there is net saving taken from the circular flow you need to offset it.
If there is inflation "more money chasing goods" and govt taxes or cuts spending.
MMT is all about having the right amount of spending in the FLOW.
You can see savings as "voluntary taxation."

Random said...

"government printing money a la Weimar Republic"
All government spending is printing money. Get over it.
Government can spend Gilts at a certain rate. It can spend reserves at a lower rate. Why pay interest when you don't need to?

Derek said...

Random wrote: "Weimar's problems were the onerous foreign debt and reparations in the Versailles Treaty and the loss of productive capacity after the war".

True enough. When I said Weimar-type, I just meant high levels of inflation. I'm aware of the underlying physical problems that led to the Weimar inflation but I wasn't referring to them. My apologies for not being clear.

Mark Wadsworth said...

Derek (21/9 at 21.24) yes I'd have to agree with that summary.

As to hyper inflation, for some reason, it only happens if you have some sort of currency controls, if you have freely exchangeable currency and no rigging or fixing, then it doesn't happen.

Bayard said...

"All government spending is printing money."

Only if we are talking in your economists' jargon. Not everyone who reads this blog is an economist, so we can't always comment in ec-speak. When I said "printing money" I meant it in layman's terms, i.e creating more money than is destroyed by taxation and at the same time borrowing forcibly from the public rather than voluntarily through the bond market.

Hugo Evans said...

'All government spending is printing money' does violate public norms of comprehension, but is operationally correct and the norms should be shifted, maybe to, 'all net govt spending is printing savings', or better still 'the govt savings service to the public has grown/shrunk by x'
The words: spend, borrow, print are unhelpful in this context.