Global Debt

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A shock-horror headline today said that global debt stands at US$200 trillion, which is about 3 times gross global product. A debt:income ratio of 3 is quite modest for a young couple borrowing to buy a home and a car, but for a business or a government it should ring alarm bells.  So should we be alarmed?

Someone drew my attention to a beautiful graphic in the Daily Mail, showing how 11 of those 200 trillions are lent and borrowed among the banking sectors of 16 countries.  It seems that everyone’s lending to everyone else.  Even China and Germany are borrowers and even Greece and Portugal are lenders.

So if everyone defaulted tomorrow… well, there would be a lot of individual winners and losers, but there wouldn’t be any Martians turning up to repossess our planet because we hadn’t kept up our mortgage payments.

What calms me is the fact that the headline is about gross debt. Someone who borrows $100k in order to buy bonds to the same value has given rise to $200k of debt, but their net debt is zero.  Even our heavily mortgaged young couple probably has money in a bank account – effectively a loan to their bank.

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