The following is a translation from Ria Novosti of an article by Natalia Dembinskaya on the US and world debt crisis, with commentary by Vince Dhimos.
“One of the leading American financiers, founder of the world's largest hedge fund Bridgewater Associates, billionaire Ray Dalio believes that a recession in the US economy cannot be avoided due to the triple deficit: budget, trade balance and current account. As Dalio explains, this will scare away foreign buyers of treasury bonds, which will provoke an explosive growth in their profitability and a dramatic drop in the dollar exchange rate by 30 percent.”
Point of no return: Trump has brought the US debt to a critical level
December 18, 2018
MOSCOW, December 18 - RIA Novosti, Natalia Dembinskaya. Huge global debt can cause another economic catastrophe. According to estimates of the International Monetary Fund, the world owes $184 trillion - about 225 percent of global GDP, or more than 86 thousand dollars per person. Who has the most huge debts, what does such a high debt load entail and who should worry about it now?
The current estimate of global debt from the IMF is almost two trillion dollars more than that published in October. The new indicator takes into account data for the end of 2017 on the basis of information provided by 190 countries since 1950.
About a third of the total debt falls on non-financial companies, and about 60 trillion - on financial ones. Governments around the world have accrued about 70 trillion dollars of debt.
The largest borrowers in the world are the USA, China and Japan. According to the IMF report, they have accumulated more than half of the global debt, which exceeds their share in world production.
Russia's external debt is one of the lowest in the world - $ 525 billion, 18.7 percent of GDP. According to the IMF, by 2023 this figure will reach 20.4 percent of GDP - a very moderate debt burden. In addition, Russia has eliminated the budget deficit. Last year, expenditures exceeded revenues by 1.5 percent of GDP, this is a surplus [sic].
Economists state: the total amount of world debt in the public and private sectors has soared by 60 percent over the past decade. And this is very dangerous.
Back in October, the IMF warned that the total debt of the countries of the world risks becoming the trigger of a new crisis.
By 2008, the average ratio of global debt to GDP was 36 percent, and now it is more than 50 percent. The fund is confident that the world economy is in this position because of political decisions that followed the bankruptcy of Lehman Brothers.
Collapse may be avoided if the financial system is reformed. But so far things are not going well with this.
"In most countries, the authorities have failed to make almost all the reforms required to protect the banking system - first of all, from the risky and rash actions of financiers, which caused a powerful chain reaction of the collapse a decade ago," the experts stated.
The IMF recognizes that some lessons over the past decade have been learned by regulators — this applies, in particular, to increasing bank reserves and tightening supervision over the financial sector. But this is clearly not enough.
One of the sources of the new crisis may be China, where the shadow lending sector has grown to alarming proportions. Chinese banks are increasingly willing to finance non-banking institutions - brokerage houses and usurers, intermediaries between banks and businesses.
The volume of the shadow sector lending in China has reached almost seven trillion dollars. The IMF believes that this bubble is capable of collapsing the country's economy and launching a new Asian crisis, similar to the 1997 collapse.
Assets grow in value
However, along with the increase in global debt, the value of state assets is also growing.
Thirty-one countries, accounting for 61 percent of global production, have significant capital of their own. The total value of assets is estimated at 110 trillion dollars, which is two times more than the aggregate GDP of these states. Another thing is that these assets are often managed inefficiently.
"Revenues from non-financial and state-owned corporations and state financial assets alone, can reach three percent of GDP per year, which is equivalent to the annual collection of corporate taxes in developed countries," the IMF said.
Thus, experts of the Institute of International Finance believe it is premature to draw conclusions about the impending economic catastrophe based on aggregate global debt data. It is more appropriate to consider the specific foci of debt in the world. The main focus is the United States, where, as American congressmen have already recognized, the likelihood of a debt crisis is greatest.
The already exorbitant debt load of the United States (more than 21.5 trillion dollars) due to the growing budget deficit risks becoming uncontrollable. Last summer, Republican Congressman Andy Biggs pointed this out, calling disproportionately high budget expenditures fuel for a “debt fire” that was growing. He recalled that budget allocations should not exceed 700 billion dollars, and in 2018 they have already reached 1.3 trillion.
“The country spends more than it takes in, and is forced to borrow money. The structural deficit creates a “path dependence.” I think we are moving towards the abyss,” said the parliamentarian.
According to the senator, the US authorities have no more than ten years to solve the problem.
- By 2026, the Medicare health insurance fund will be exhausted.
"It will be possible to depreciate money, declare a default or try to raise taxes and kill our economy. These are our prospects in eight to ten years,” the congressman stated.
Record growth rates
It does not seem that any improvement in the US budget situation can be expected.
Under the Trump administration, national debt has been growing at the highest rates in the past six years: by $1.9 trillion in two years. In the next couple of years, according to estimates by Bloomberg analysts, another 4.4 trillion will be added.
The IMF especially emphasizes that the assets of the American public sector are largely concentrated in state pension funds, mortgage and student loans. Under the scenario that assumes higher interest rates in the long run and a rapid fall in the prices of shares and real estate, the public capital of the United States by 2020 will be reduced to 26 percent of GDP.
One of the leading American financiers, founder of the world's largest hedge fund Bridgewater Associates, billionaire Ray Dalio believes that a recession in the US economy cannot be avoided due to the triple deficit: budget, trade balance and current account. As Dalio explains, this will scare away foreign buyers of treasury bonds, which will provoke an explosive growth in their profitability and a dramatic drop in the dollar exchange rate by 30 percent.