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Global Debt and The Inevitable Capitulation of Central Banks

Year after year, global debt has continued to increase exponentially-- surpassing $217 trillion in 2017.  With this sharp increase comes the larger issue of tending to/servicing the debt, an inevitable task looming over governments and central banks globally.  The interest on global debt currently accounts for roughly 13% of global GDP.

With global interest consuming 13% of global GDP, central banks have found themselves between a rock and a hard place. They were able to hinder the course of a global financial meltdown in 2008, but only by lowering the interest on these debts from around 8% to now close to 0%. In addition, global debt has been rising at a rate of 5% per year, while global nominal economic growth has only been expanding at a dismal 3% since the last crisis.

Because global debt is now so massive, central banks cannot raise rates too high without risking a depression, yet at the same time, this bad lending policy almost ensures defaults at the consumer, business, and government levels. These defaults will increase the cost of risk for lenders and eventually result in higher interest rates. If this sort of capitulation from debtors to pay their debts occurs, we could witness the largest global financial meltdown in history.  Though central banks and governments are lacking resources when it comes to interest rates, they have a couple more options. One could be to service the debt through the printing press. By simply devaluing the currency through note production, it becomes more favorable to borrowers so that they are able to kick the can even further down the road. However, this option runs the risk of welcoming runaway inflation. We have seen the havoc hyperinflation can wreak on a country, but the effects on a global scale would be unfathomable.

The only other route governments have--and the least likely to occur--are austerity measures.  They can attempt slowing an already excruciating GDP growth in exchange for narrowing, or even eliminating the gap between economic growth and the growth in debt. This option will likely only be used as a last resort, as implementing austerity measures reflects poorly from a political standpoint.  

Whichever method governments and banks use to approach the situation, as a society we must pray that it is successful.  Our situation is very similar to the "lost decade" witnessed in Japan following their asset price bubble collapse in 1991-- a 10 year period of stagnation with almost no growth. The magnitude of the imminent disaster awaiting us in the dark is unknown, yet it steadily approaches.