What Everyone Gets Wrong About Global Debt | Economics Explained

the USA currently has 31.5 trillion dollars in public debt just held by the federal government alone which doesn't even include the roughly 3.2 trillion dollars in state debt or the 17.1 trillion dollars in household debt well the 24 trillion dollars in corporate debts that's also just the USA which is the world's largest and simultaneously most indebted Nation but only accounts for a small portion of total Global debt which is now over 300 trillion US dollars that number includes everything from the trillions of dollars of US government securities to the 500 owing on someone's credit card it's all money that's been borrowed from somewhere to perform some kind of economic activity be that funding the development of national infrastructure or buying a PS5 averaged out that Global debt figure is now almost three times Global GDP the average person alive in the world today owes nearly forty thousand dollars which is particularly concerning when it's remembered that the average person only has a per capita output of just over ten thousand dollars economists and commentators all say very different things about this situation and their opinions vary from it's nothing to be worried about all the way to this will end the global economy as we know it as with most things the reality exists somewhere in between these two extremes most sensible economists are worried about debt levels but as long as a few things don't go wrong then it should be sustainable even if it does cause a few other problems one of the important things that people can do on an individual level is simply understand the functions of debt and how it behaves differently on an individual National and Global level so who do we owe all of this money to can a debt load three times Global GDP ever be sustainable is there any responsible way to reduce this debt and finally what could go wrong if we can't debt on a global scale behaves a bit differently from debt on an individual level where someone takes out a loan from someone else and then pays it back over time because well there is no external entity loaning money to the world economists often joke about this by saying that we haven't figured out how to get martians to approve our loan applications yet strange nature of global debt means that it can sometimes be quite hard to fully understand so fair warning but stick with us here and you'll probably walk away knowing more about global debt than most of the people writing headlines about how bad our situation is debt is simple to think about when it's one entity that owes money to another entity that gave them the money in the first place but then the global economy is also owed to the global economy every liability for a government company bank or individual is an asset for another government company bank or individual when the global economy borrows money it's not so much borrowing it from some other entity as much as it's borrowing money from its future self if we completely simplify Global debt and assume that everything is just one single loan with an outstanding balance of 300 trillion US Dollars then to increase this balance we would need to spend more than we pay back to that loan if an individual does this it could be seen as irresponsible but remember on a global scale for every dollar added to this loan is an equal dollar added to an asset on the other side of the balance sheet taking on more debt can be a really good thing if if it's used to invest in the projects that will produce more value for the global economy in the long run when economists talk about debt on an economy-wide scale they usually talk about it in relation to GDP as a well better GDP ratio this is a very useful measure for economists but it's also very easy to misunderstand and make sounds scarier than it really is total Global debt is now three times total Global GDP but debt accumulates where GDP is a discrete measurement made year to year if an individual had a debt that was three times their income that probably wouldn't be a huge cause for concern assuming that it was debt like student loans or a mortgage that will add value to that person in the long term a better measure might be something like Global debt compared to Global assets sort of like a global net worth this is great because it might make you all feel a bit better about the global debt situation but also lets us say a number that we've never been able to on this channel before total Global assets meaning everything from houses to cars to stocks and cryptocurrencies and yes even the bonds and loans that make up Global debt was collectively worth around one quadrillion US dollars in 2021 that means that the net worth of the planet after subtracting This Record Global debt is around 700 trillion US dollars so overall we're doing better than we ever have been before now economists don't often use this figure for starters asset values are really hard to figure out accurately a family heirloom may be worth a lot more to one person than another and it's hard to determine values for all this stuff on a global scale so that one quadrillion US dollar figure is probably leaving out a lot of smaller less liquid assets as well beyond the difficulties of working with asset values economists can work out most of what they need to know from GDP figures so they focus on those even if it does give the average person the wrong idea about what is going on in the world GDP is simply the total output of an economy theoretically this could be measured by adding up the total value of every good and service produced for the market in that economy every year but that's very difficult to do because it would involve putting an economy at the end of every single production line and restaurant and Builders office in the economy which is obviously something that is not feasible instead economists will look at spending because if something is produced for the market the market will purchase it in some way this is kind of like a photographer working with negative images the details they collect are the exact opposite of what they need but they can still use it to put together a detailed image of what's going on GDP is equal to Total output which is equal to Total market demand that demand is broken down into consumption investment government spending and net exports since we're looking at the total global economy we can ignore net exports because again for now we aren't doing any trade with the Martians so net exports are zero nothing is leading Earth and nothing has been imported either and quick side note is that if a business produces something for the economy that is not purchased by consumers it will either be counted as an investment if it's put into storage to be sold at a later date since this is technically an investment into inventory or if the business discards it it will still be counted as consumption because macro economists putting together GDP figures don't care if it's consumed by a person or a rubbish bin anyway increasing debt will all other things been equal increase output because there will be more purchasing power to go into all of these three categories if if governments increase their debt it's usually to fund welfare or infrastructure projects without raising taxes if households take on debt they'll use it to consume goods and services or to make investments into things like housing businesses take on debt to buy Machinery or in recent years to buy back their own shares which in either case is a type of investment governments businesses and households are the three groups that account for all Global debt some economists will also include a special category for financial corporations since they take on debt for the purposes of creating more debt somewhere else rather than taking on debt for their own consumption or Investments whatever the debt is used for it will initially increase one or more of the factors that make up GDP but then after it's taken out it will need to be repaid which means households businesses and even governments will have to spend less to make their repayments on an individual level taking on debt and paying it back will happen in big Peaks and long valleys but the global economy is made up of 8 billion people millions of businesses and hundreds of governments so the law of large numbers Smooths out this trend but it doesn't eliminate it the cycle of everyone taking on debt giving a boost to the economy followed by a sluggish period where the debt has been paid back doesn't happen completely randomly when people have confidence in the future employment is high and Global conditions are good people will normally take on more debt boosting their consumer spending and investment once this debt level gets a little bit too high and people need to start focusing on making repayments rather than buying more stuff their consumption and investment will fall reducing outputs scaled up to the level of the global economy this shows how we technically borrow from the future rather than some other entity out there when we talk about global debt levels this is what a Commerce call the debt cycle that's why even without external shocks the economy goes through natural Boons and busts every 10 years or so the role of governments in this cycle is to try tribe as much as possible to do the opposite of what consumers and businesses are doing when they're taking on lots of debt to boost consumption and investment governments should tax more and spend less to save up more money and rein in the spending a little bit so things don't get too crazy when everybody's focused on paying back their debts the government should tax less and spend more to keep the economy from stalling completely this is called counter-cyclical fiscal policy normally governments are quite good at stimulating the economy during down times in the debt cycle or due to shocks we saw this firsthand after the GFC or more recently with the pandemic what governments aren't as good at is taxing more and spending less during the good times because it's just not as politically popular this means consistently for recent decades governments around the world have been taking on more and more debt in line with and even exceeding the rates that businesses and individuals have been but that's not necessarily A Bad Thing if debt is used to expand the productive capacity of a country to create more value than the debt will requiring repayments then it's a good thing the world gets wealthier now and it will leave enough behind that its future self will be wealthier too the simplest way for governments to do this is to invest into infrastructure and education to make their country more productive some government spending will naturally need to be put towards projects that are purely humanitarian interests but most are not things like Rail lines or public roads are built for public good and these projects will never make a profit in the traditional sense because they often don't even directly charge people to use these pieces of infrastructure but almost every Advanced economy in the world will employ economists to do benefit studies on major projects before they are built to make sure that they will produce more economic value over their expected lifetimes than they cost if a rail line can transport goods and people to where they need to be more efficiently than existing Alternatives then businesses will be able to produce more and individuals will be able to get to work more easily this means that they'll pay more tax so the government can go on to fund more projects in the future it might seem very cold-hearted but the same kind of analysis is even done on government spending like defense and social programs a country with safe trade routes defended borders lower levels of crime and opportunity given to people down on their luck will produce more output overall and again pay more taxes if governments take on debt to endlessly fund projects that don't produce the positive economic return then they will eventually go broke of course politics sometimes gets in the way and spending is misdirected that's where government debt can become a problem a lot of the spending on stimulus measures during the pandemic done by a lot of governments around the world won't have much of a long-term positive effect on the economy's output that's not to say that these policies were a mistake it's just that desperate times called for desperate measures and those policies were more focused on avoiding an economic meltdown in the short term rather than setting an economy up for growth in the long term the composition of GDP is arguably even more important for households and businesses as they contribute to consumption and investment at theoretical economy could produce a plate of pasta for someone to eat or it could produce a pot that would be used to make more pasta both of these are items that have value but the pot will keep its value and go on to be counted in the roughly one quadrillion US dollars worth of assets worldwide the pasta once it's consumed doesn't have any value anymore get taken on to buy assets is therefore normally seen as good debt where debt taken on for consumption is bad debt because there's no way for pasta to provide any future economic value to pay off the debt that was required to Consumers that's the simple breakdown and most debt in the world is used to make investment purchases this means stuff being produced now will go on to grow the one quadrillion dollar collection of assets that make up the global economy and make us richer overall all other things been equal the global economy would be better off for having a quadrillion dollars worth of capital and 300 billion dollars worth of debt rather than just having 700 billion dollars worth of capital because all of that extra could be giving people better jobs creating new Industries advancing Technologies and just generally doing things that will grow the economy in the long term but this depends a lot on making sure those Investments are made into assets that will help to increase output global net worth is a portion of GDP is up by roughly 50 percent in the last 50 years and 25 in the past 20 years alone in that same time GDP is more than 10 times what it was back in 1970 now this might sound like a good thing but what it really means is that the Investments the world is making into this quadrillion US dollars worth of assets a 50 less productive than they were 50 years ago this is especially true in advanced economies where wealth has grown much faster than output so debt is increasing but the true value of the economy is increasing much faster at least on paper the value of anything is determined by the forces of supply and demand so all the value that has been built up in the global economy's balance sheet depends on how much someone is willing to pay for it this is the real risk of higher level debt levels when things go bad the market value of assets can fall much faster than debt which long term only really loses value if it's no longer possible to recover say for example if the debt is Forgiven which is happening in a lot of countries around the world right now or if the borrower just simply can't pay it back a good way to think about global debt is in terms of the risks it presents it can make good times extra good as the economy can expand more rapidly and build out more projects that wouldn't have otherwise been possible without debt but it can make bad times worse because the debt holders want their repayments no matter what today's debt load is high compared to Output but lower than it has been in the past compared to the total wealth of the planet so that's great as long as that wealth is working to build more output and opportunities for the global economy which unfortunately it hasn't been a lot of the assets that have seen the greatest appreciation in recent decades have been non-productive assets mostly real estate all the real estate in the world is worth roughly 350 trillion US Dollars about 250 trillion of that or two point 0.5 times Global GDP is just land and the remaining 100 trillion is made up of the physical buildings that sit on top of that Land If an economy invests a lot into researching new technologies that have the potential to make production even more efficient then in the long run those investments will help to create even more output growing the amount that can be reinvested or simply enjoyed as consumption if an economy invests into land it doesn't change the fundamental nature of that land it just makes it more expensive more expensive land means that one of the factors of production land labor and capital becomes less affordable which puts downwards pressure on output investment into real estate also comes at the expense of investment into other potentially more productive Investments a lot of rapidly developing countries around the world today are having serious problems with debt because their growth is stalled and getting finances become very hard and expensive it's much safer for debt to flow to assets like real estate and advanced economies than it is to flow to factories in developing economies even if the factories will go on to produce more for the global economy than a pile of dirt on a global level it would be much better if debt wasn't used to fuel speculation on an unproductive asset but still the debt isn't a problem although zoom in to a national level and it becomes important to ask who we owe all of this money to 95 of all the wealth or the net worth of the world including the 300 billion US Dollars owed in debts is owned by households and the other five percent is owned by governments businesses that are primarily responsible for creating value in the economy do own assets but then the companies themselves are owned by people either directly if they have shares in the company or indirectly if they own them through retirement savings plans the five percent of global net worth controlled by governments is made up of foreign currency reserves public real estate state-owned Enterprises Sovereign wealth funds and in very rare cases loans made directly from the government a lot of governments including the US federal government have negative wealth China has the largest share of global government wealth mainly in the form of foreign currency reserves land Holdings and is a rare case where the government itself gives out loans directly to other countries although that hasn't been an outstanding success for them Global debt isn't a problem but what we are using the debt for might be and while it might feel good to say that on a global scale we just owe this debt to ourselves on any other scale that's not true the average net worth of someone on Earth is around 90 000 US dollars but that average is skewed by just a few extremely wealthy people and that might be a problem but we're gonna make an entire video on that next week so I don't want to reveal too much here but make sure to subscribe so you don't miss out on that one when it comes out or if you prefer to listen to these videos we make all of them as well as full interviews with world-class economists available on our Spotify page thanks for watching mate bye foreign

Channel: Economics Explained

Views: 1,237,984

Keywords: economics, economics explained, economy explained, global debt crisis, debt ceiling

Id: IAqj30s4lH8

Length: 16min 41sec (1001 seconds)

Published: Sun Jul 02 2023