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In the end, debts cannot be paid

  • 08 November 2017


Once upon a time, usury was considered a sin and lending was subject to strict controls. Now, the world is in the grip of usury. It cannot continue. At some point it will have to be retired, or swapped to equity. A good place to start is third world debt, which is the most immoral variant.

First, a glance at the scale of the problem. Global debt is estimated to be about $US220 trillion, which equates with over 300 per cent of world GDP. Japan is in the worst position, with a debt to GDP ratio of a staggering 250 per cent (the get out clause is that almost all of it is owed internally).

America’s debt is officially $US18 trillion, about equivalent with its annual GDP, but there are some estimates that put it at about triple that. When unfunded liabilities are included, the debt figure gets even higher: $US150-350 trillion. At $US18-20 trillion every American man, woman and child owes something in the vicinity of $US60,000, and at the higher estimate, the per capita debt figure balloons.

In Australia, government debt is comparatively low, despite the recent Budget deficits. It is just over 40 per cent of GDP, which is about half the level for most European countries. But Australian household debt is extremely high because of borrowing to buy into the housing bubble. According to the IMF, household debt is 100 per cent of GDP, compared with an average of 63 per cent in other developed economies.

The ABS estimates household debt has doubled over the last two years from $94,100 in 2003-04 to $168,600 in 2015-16 — mostly borrowing for property. About 30 per cent of households are classed as over-indebted.

These are the conventional figures, and they are well known. But there is another dimension to the global debt binge — leverage. The debauch in the financial system that led to the global financial crisis was based on investments known as derivatives: complex bets derived from more conventional transactions such as mortgages, share investment, interest rates or currencies. These are currently at a staggering $US700 trillion, almost ten times the size of world annual GDP.

It represents an even bigger debt mountain. The way it works is that traders amplify their bets by borrowing massive amounts. For example, with one derivative, known as a contract for difference, they might put up only $5000 for a $100,000 contract, effectively borrowing the other 95 per cent. A