The game, I am afraid, is up. For most of this century, monetary authorities, faced with deep structural problems in the global financial system, have responded by kicking the can down the street. Their main trick was lowering interest rates to ludicrously low levels, eventually all but removing the cost of capital, which is central to how the free enterprise system operates. Central banks also invented various ways of printing money such as Quantitative Easing.
Private actors have been worse. The banks created too much money by over lending. Traders in the foreign exchange markets invented hundreds of trillions in derivatives (transactions derived from other financial assets such as bonds or currencies). And messianic crypto currency advocates invented new forms of digital money claiming it would solve the problem when in fact it just perpetuates it.
Now, we are saddled with a system of immense complexity that is dangerously indebted. In 2021, global debt reached a record $US303 trillion, up from $US226 trillion the year before, a disastrous jump. It represented the biggest one-year debt surge since the Second World War, according to the IMF.
A quick sum shows how problematic the situation is. The world economy is about $US85 trillion, meaning the debt is 350 per cent of global GDP. Notionally, if the interest rate on that $US300 trillion is 2 per cent, the interest payments equate with 7 per cent of the world economy. If the rate is 3 per cent the interest payments equate with about a tenth of the world economy: and so on. Of course, actual interest rates will always vary greatly by country and region; this is just to sketch out how big the debt overhang is and how much it has the potential to suppress world economic activity.
Monetary authorities are caught in an impossible situation. Inflation is rising: it is over 5 per cent in Australia and over 9 per cent in the United States. The conventional wisdom of central banking is to ratchet up interest rates to slow demand and push prices down, but this would run the risk of depressing economies and bringing on stagflation – a result that might be inevitable anyway. And in any case, the inflation is mainly being caused on the supply, rather than demand, side due to commodity price rises and the fragmentation of global supply chains in the wake of the pandemic.
'What is increasingly being discussed are ways to cancel the debt. Finding