Wednesday, April 11, 2012

Unsustainable Global Debt

The biggest market in the world is the European Union and debt problems are still rippling through the global markets.  It is apparent with the financial crisis that the global markets are tied together by large banks and interconnected trade.  A problem in the largest market should be unsettling and the unemployment rate in the European Union is now at a 15 year high.  The global debt problem was never really solved but papered over with extensions and banking trickery.  The US has dealt with much of the debt issues by suspending major accounting rules and stuffing bad loans into the Federal Reserve like a Christmas stocking.  The European Union is facing some challenges ahead and all eyes will be watching given the impact of contagion impacts.  Greece was only a tiny sliver of the debt issues compared to the major debt restructuring that will be necessary for a large economy like Spain.

Unemployment in the European Union rising to higher levels
The European Union is facing a very problematic recession.  The unemployment rate continues to climb:
eu unemployment rate
The unemployment rate now stands at 10.8 percent.  Countries like Spain have an astounding 23.6 percent headline unemployment rate.  The young in Spain are facing an unemployment rate above 50 percent which is stunning for a developed market economy.  These kinds of structural issues cannot be peppered over with more debt.  The issues facing the global markets are based on peak debt situations.  Central banks like the Fed and the ECB are dealing with the crisis as if it were based on short-term liquidity issues.  Like someone asking you for rent in the middle of the month when your paycheck will not come in until the end of the month.  In this case, you know the income is forthcoming and will cover the requested payment.  That is not what is impacting the global economy today.
Peak debt has been reached in many cases and when it hits markets are forced to deleverage and price discovery unfortunately is a necessary and painful process.  To think that the European issues will stay isolated is unrealistic.  If we take a look at our biggest trading partners we will find some familiar names:
top us export markets
Three of our top ten trading partners are in Europe.  Not only is this the case, China’s two largest markets for selling goods are the US and Europe.  If you look above, China is also a major trade partner with the US.  If the crisis deepens further in Europe the rippling impact will be felt throughout the world just like when the crisis caught momentum in 2007.
Total global debt continues to grow
In 2002 total global debt was above $80 trillion.  In 2010 that figure more than doubled to over $190 trillion.  Looking at the below chart is stunning given that GDP is unlikely to support this amount of global debt:
total global debt
Source:  Business Insider
Today the global debt to GDP ratio is over 300 percent.  You will notice that as the crisis hit in 2007 GDP actually fell but total debt kept going up.  Even as GDP recovered global debt continued to expand.  It is hard to moderate the appetite of central banks seeking to transfer toxic assets from banking associates and removing any opportunity for real price discovery.  Much of the price discovery is being shouldered by the citizens of each of these countries.  The financial sector especially with the too big to fail has been sheltered at all costs.
Yet peak debt is hitting hard across the global markets even here in the US where our total debt just seems to keep going up and up.  We are likely to reach another debt ceiling limit in 2012.  We are already seeing that massive amounts of debt have a limit on what they can do for an economy and we are already seeing inflation on the cost of daily goods that Americans buy.  Those that don’t bother shopping might say inflation is not bad but the average American with a $25,000 paycheck is feeling the pinch more and more each day.
Just look at our own government debt:
government debt
If we look at our own debt, it has gone from roughly $6 trillion in 2000 to a stunning $15.2 trillion.  At some point people will collectively begin waking up and realize none of this debt will be paid back.  Not exactly a pleasant realization.

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