Saturday, June 9, 2012

Money (5): Endgame - The End of the Debt Supercycle and How It Changes Everything

Take a look at the chart below, the sovereign debt projections for a few developed countries as a percentage of GDP. This is another eyes popping chart.
Public Debt/GDP Projection (BIS Working Paper

The red dotted line is how it would be if situation remains status quo. The green dotted line is how it would be with serious efforts to cut down deficit spending. The blue dotted line is how it would be with inhumane level of spending cut, like pensions and social services like health care, education, etc.

I first came across this chart from a book:  Endgame - The End of the Debt Supercycle and How It Changes Everything. The authors are no doomsday prophets. This is a very serious book with lots of statistics, charts, historical trends, precedents and a comprehensive survey of the various schools of economics ever put into practice. This is one the most demanding book that I read recently.

The chart below includes private debt.

To summarize - the statistics and trends all lead to a hell of a BANG. The book gave a few possible outcome and possible actions by the various countries, but none is pretty. One thing is sure - these mountains of debt can't be repaid, and most won't be repaid.

The graph below is another way of understanding what the sovereign debt means to the people.

The interest cost is over 250 billion in 2012 for U.S., and is projected to grow to 800 billion in 10 years time. And the annual total tax income of U.S. is only 2 trillion dollars!

The question is ...

Here I would like to explore this phenomena from another angle. 

The Fantastic Growth of the Financial Industry

Size of Financial Assets as Percentage of GDP of the Host Country
Luxembourg2,461% Austria299%
Ireland872% Spain251%
Switzerland723% Germany246%
Denmark477% Finland205%
Iceland458% Australia205%
Netherlands432% Portugal188%
United Kingdom389% Canada157%
Belgium380% Italy151%
Sweden340% Greece141%
France338% United States82%
This is another eyes popping chart. How is it possible for the banking sector to grow to such an enormous size? To give you another perspective - the size of the 3 largest banks in France amounts to over 300% of France GDP. The too big to fail banks has actually increased in size and number after the 2008 meltdown! Now these banks are not only too big to fail - they are too big to bailout!

A note of explanation to those who are not familiar with the banking business. Banks are not into buying and owning real assets like land, houses and commercial buildings. Banks 'assets' are almost exclusively what other owes the banks. In other words bank assets are exactly what the rest of the world owes them.

Now just how much are the banks earning? In U.S. the banking sector profit account for over 35% of all U.S. domestic profits (down from over 40% prior to the 2008 meltdown)! Just exactly what 'productivity' do the banks add to the society to justify such a huge chunks of profits?

It doesn't take an Einstein to see the correlation between the fantastic growth in debt and the fantastic growth of the private banks. Now every country (perhaps except for North Korea) is seriously in debt. We have the grotesque situation where the whole of humanity is owing an astronomical amount of money to a few private banks.



Todd Marshall said...

I have responded you your critique of my critique of E.Browns "Web of debt". I would like to open a dialog as I really do have the solution.

Humble Voice said...

Hi Todd, I don't think I am qualified to have a meaningful discussion about a solution to the mess we are in.

However I would like to refer you to There is a forum in the web site with fairly active participations.

PositiveMoney produced a fantastic 1 hour documentary about the money system. It is the best I have seen. I highly recommend it.