Massive, unprecedented debt in the developed economies could cause economic stagnation the world over
The world's financial and economic systems are now flooded with debt. In fact, we are witnessing the biggest debt balloon ever, with debt around the world inflating to a quadrillion US dollars. Yes, that's a staggering US$1,000,000,000,000,000.
How can this huge debt, unprecedented in the history of mankind, be paid off? It can't be forgiven or swept under the carpet. It can only be serviced by further economic growth. But it appears that the world's growth engine has stalled. As a result, we are seeing deflationary pressure in the developed world. The result is likely to be a deflationary depression that could result in further geopolitical dislocations.
Most of the media headlines on this subject go to describe the debt problems in Greece, Portugal and Italy. But Japan's sovereign debt problem is most acute and the highest in the world, equivalent to 219 per cent of the country's gross domestic product. Japan is now serving its debt at a rate of 1.50 per cent. If the interest rate were to rise to 3.50 per cent, Japan would not be able to service the interest alone.
Robert Prechter wrote on the Elliott Wave International website: "British banks have amassed $4.4 trillion worth of foreign liabilities, twice Britain's annual GDP … England, moreover, has not defaulted since the Middle Ages."
Strangely enough, bankers still rule the world. The latest efforts to reform the global banking system are not gaining any significant ground. The bankers now have an even bigger say in the regulations designed by the Basel Rules of the Bank for International Settlements.
"The world's banks appear to be winning a reprieve from tough new capital requirements and curbs on risk-taking, as regulators and central bankers are moving toward less stringent rules than initially proposed," according to an article in the Wall Street Journal yesterday.
In the US, attempts to tame the banking system have also been watered down. The historic finance bill, which is about to be signed into law, is a compromise in favour of the big banks. President Barack Obama said he hopes to sign the bill next week.
The US debt is also approaching 100 per cent of GDP. We are now talking about the massive indebtedness of the US, the world's largest economy, of Japan, the second largest economy, and the UK, the sixth largest economy. The deflationary pressure in the developed economies could lead to a day of reckoning or a deflationary crash.
Although China has just racked up about 10-per-cent growth in the first half of this year, it can't pull the global economy along with it. China still depends largely on the US and the developed markets for its export products. Its factories could end up with huge overcapacity and inventory overhang.
Thailand's finances remain largely sound. But we should heed the warnings. Debt creation in the face of a global slump is a very risky business. Although the Bank of Thailand has raised its benchmark rate by 25 basis points to 1.50 per cent, it is not time to celebrate victory and recovery from the financial crisis and global recession. We also cannot exclude the damage caused by the political turmoil in April and May - a problem that could resurface here soon.
As the deflationary pressure is likely to worsen, it is time for us to adopt policy prudence - less debt and more hard work.