There’s been a lot of bubble talk lately.
Bitcoin, stocks, bonds…
Leaving cryptos out of it for the moment, global stock and bond markets have been driven into bubble territory by one overriding factor.
After a decade of central bank driven ‘cheap money’, the world is awash in debt.
The Australian Debt Clock lists total government debt — state and federal — at $774 billion…and counting.
Total private debt — business plus household — is a staggering $2.8 trillion. Household’s bear the brunt of that burden, at almost $1.9 trillion. That makes Aussies among the most indebted citizens in the world. One record we could do without.
Reserve Bank of Australia (RBA) governor Philip Lowe tried to soothe the nation’s nerves last week. The RBA kept the cash rate at its record low 1.5%. And Lowe said it would likely stay there for the foreseeable future.
That’s all well and fine. But living on our own continent in our own corner of the world, it’s easy to forget that what happens in the rest of the world has a big impact Down Under.
For the love of debt
The Australian government and banks, after all, depend on foreign lenders to fund part of our insatiable appetite for debt. If international investors can get better returns overseas, borrowing costs in Australia will have to go up to lure those investors back.
And with the US opening up the spending floodgates while cutting taxes, the US deficit is racing into uncharted territory. Trump’s new spending package, approved last week, is expected to add US$1.7 trillion to the already towering debt pile.
And bond yields reacted by heading higher. 10-year Treasury yields hit a four-year high of 2.88%.
But the debt problem goes way beyond Australia and the US.
According to the data from the Institute of International Finance, global debt hit US$233 trillion (AU$298 trillion) in the third quarter of 2017.
To put that in some kind of perspective, global GDP (gross domestic product) in 2016 was approximately US$75.4 trillion, according to Statista.
That means if every person on Earth put every cent they earned into paying off the world’s debt, we’d be at it for three years. Hypothetically, of course. Because the world would shut down under this scenario.
Connecting the dots, how long do you think it will take for the world to pay off its debts?
If you said never, go to the front of the class.