The World's $8 Trillion Debt Hole

Anthony Mirhaydari MSN Money February 2, 2012

2/1/2012 6:04 PM ET

By Anthony Mirhaydari, MSN Money

There's a huge pit of private and public borrowing we have to work our way out of to really get the developed world's economy moving again. And budget-cutting won't do the job.

Anthony Mirhaydari

If you're like most Americans, you've got a love-hate relationship with debt.

On one hand, its wide availability in the modern era has enabled expanded homeownership, compensated for stagnant wages and kept the country from having to make hard choices on things like taxes, federal spending and entitlements.

On the other, our deep-down fiscal Puritanism knows that too much debt is a bad thing. It encourages blatant consumerism and me-too, right-now gratification. It greases the skids of pork-barrel spending out of Washington. And it fueled the housing bubble.

How much debt is too much?

What's worse, after years and years of credit-fueled indulgences, the bill has come due. It's big. Really big. And it's acting as a drag on growth. According to Credit Suisse strategist Andrew Garthwaite, excess debt in the developed world now totals $8 trillion, or 20% of rich-world gross domestic product.

Until that chunk of change is dealt with -- until we start paying it down, default on it or grow the economy so that it doesn't look so big -- the recovery's not going to take flight, the job market won't normalize and home prices will stay down.

And the only way out is through more debt, at least in the short term. That may seem counterproductive. But here's why it's true.

First, a review of the overall problem is needed. Over the past few months, I've talked a lot about risks related to the West's debt burden. It's a big deal. Further, it underpins the problems we're facing now: the eurozone crisis; the August downgrade of America's AAA credit rating; and the shrinking effectiveness of extraordinary monetary policy out of the Federal Reserve and other rich-world central banks.

In the United States, as shown in the chart above, the rise in debt was driven first by consumers during the housing boom. Now, it's the government.

You can also see this in the feebleness of the current recovery. Credit Suisse economists point out that GDP growth in 2011 was the weakest in a non-recession year since 1947. Job growth was moribund as the number of Americans participating in the labor force continued to shrink, falling to levels not seen since the early 1980s. And corporate investment has "rebounded" to the lows seen in the depths of the 1991 and 2001 recessions. Not exactly worthy of a spike-the-football touchdown celebration.

Malaise in the West

Late last year in "Investing for a year of chaos," I highlighted studies by Nomura Research Institute's Richard Koo, who is based in Hong Kong and is an expert on Japan's long, debt-driven malaise. Koo believes that Western economies face something similar to the post-1990 Japanese experience -- namely, a prolonged slump caused by persistent deleveraging.

This happens as large parts of the economy focus mainly on minimizing debt -- a change that throws many of the economy's natural motivators into reverse. Businesses delay buying equipment that would help boost profits, governments don't fund new infrastructure projects to increase competitiveness, and households put off buying the latest gadgets.

In the corporate sector, you can see it in the growing cash hoards on balance sheets. In households, you can see it in the falling levels of mortgage debt as people give their devalued homes back to their lenders. The banks see this in meager demand for new loans. The government hears it in political clamoring over debts and deficits.

The risk, according to Koo, is that households become too poor to save and repay their debts and the economy falls into a depression in a downward spiral of lower home prices, loan losses and layoffs. This is the debt-deflation spiral (.pdf file) that Irving Fisher warned about during the Great Depression. The gist of it is that lower asset prices (for things like housing) encourage debt liquidation, which weakens the economy, encouraging even lower asset prices, a weaker economy and yet more liquidation.

Until households start to recover, businesses will be loath to spend on expansion and investment. And the weaker economy that results further damages the government's finances. The cycle feeds on itself.

The other risk is that governments, which act as the borrower and spender of last resort in these situations, tighten their belts prematurely. This, as I've said before and has been borne out in the economic research (.pdf file), was responsible for the 1937 double-dip that extended the Great Depression. And it was also responsible for the 1997 and 2001 slowdowns that extended Japan's deflationary spiral.

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Mail"},"omniAccount":"MSNPORTALSCP","ratingsControlId":"ratCntrlBinary","ratingsItemId":"scp:bbcdiscussion:75dd6378-eb5f-455a-a835-0d2961c56e07","appUri":"http://social.msn.com/boards","pageUrl":"http://money.msn.com/investing/the-worlds-8-trillion-dollar-debt-hole-mirhaydari.aspx?page=2","ratingTags":["00120065-0000-0000-0000-000000000000","00000065-02a6-0000-0000-000000000000","ART"],"fblkShow":true,"fblkAppId":"","fblkRef":"","fblkTrkName":"","fblkTrkVal":"","twtShow":true,"twtTrkName":"","twtTrkVal":""}); }); /**/ 30CommentsNewestOldestBestWorstControversial12 Canuck 887 minutes agoAnthony, why do you only scratch the surface of comprehension. You are way behind the 8 ball, telling us we were on our way to recovery in November. Now, when you finally relaized theat Europe is just a Crystal Ball of the US in a year or two. 2024? Get real!!! We have MAYBE a year and a half left. Look at mark to market Big Bank balance sheets and secret Fed loans, to keep them afloat. History repeats itself and the fall of the Roman empire, was due to clipping silver and gold coins, much the same as we have devalued and will continue to devalue our dollar. The politicians are the same with socialist popularity and back stabbing (Julius Ceasar,Brutus) and the New world is comming. The bigger they are the harder they fall. Only thing worth anything in the future will be what it always has been... precious metals. Remember the old saying "Worth its weight in gold" Now where did they get that from? The writting is on the wall...do you read it like Anthony? 1 0ReportSpamjlum1 hour agoTime has run out for some countries and very little time left for the US. There are no easy options left. The people in power do not want to make any decision. The rest of us just sit and watch this bloody and ugly financial catastrophe. Funny, you can not seem to look away. 8 1ReportSpamTom Johnson1 hour agoI feel dumber reading this article. Once the huge housing bubble burst, every idiot who cashed out their equity to buy worthless junk was screwed. Most people are just plain stupid, and there is no way to fix that. 12 1ReportSpamdyad2 hours agoIf the extremely wealthy were to pay their fair share of taxes, there would be no debt crisis. It is just this kind of utter ignorance that gives cover to despicable politicians. The fact is that you could confiscate 100% of all income over 1 million dollars and it would not put a dent in the debt, and would not even significantly effect the deficit. The math is simple enough for even a dull grade-schooler.On the bright side - if ignorance is truly bliss - this poster has reached nirvana. 17 10ReportSpamIce Cold Sangria2 hours ago

The extremely wealthy did pay their fair share of taxes . . . when GM went Chapter 11.

8 8ReportSpamSammyBoy13 hours ago

I find it very disturbing that anyone can say out loud that anyone needs to pay more taxes. When the government audits itself and holds itself accountable for all of the money they waste, then they can ask the american people for more money, or as Obama puts it "paying their fair share."

What's disgusting is how crappy our infrastructure is. How a self sustaining program like social security is going bankrupt from medicare/aide taking money out of it's cash pool. How our government slashes $ from education when education makes up piddly poop of the budget.

So bring on the class warfare. Bring on the progressive system that doesn't tax the poor, but makes anyone who lifts themselves out of poverty, poor again - after taxes. Let's watch our corporations who are handicapped by sherman laws and anti trust acts compete with companys (like China's) who don't play by the same rules. Let's watch more free trade agreements be signed so American workers are kept out of business.

Let's get real. We're not protecting our people. We're not ensuring any kind of "great future". And we sure as hell are not accomplishing jack-squat by saying "If the Rich paid their fair share". The government asking the rich to pay more money to fund this hodge podge of bullcrap is not a problem anybody with a brain cares about. You know what focusing on that problem does? It makes people feel better about having their pants pulled down and bent over.

Maybe one day we'll have statesmen and not politicians in Washington D.C.

Yeah... right. lol

25 7ReportSpamIce Cold Sangria3 hours ago

Businesses have no need or desire to take out new loans. The same goes for people.

Servicing the debt is not an issue. We are going to default. Everybody knows it except Bernanke.

16 4ReportSpamHartwell3 hours agoIf the extremely wealthy were to pay their fair share of taxes, there would be no debt crisis. 12 37ReportSpamMelvin Carter3 hours ago

The debt crisis is even worse than what is mentioned in this article. The major banks are holding roughly 15 trillion dollars in toxic derivative debt off their balance sheets. The Federal Reserve has been secretly doling out money to those banks to service the interest on that debt. The Federal Reserve itself is also leveraged out by about 50 to 1. When you combine this reality to the massively overleveraged banks in Europe it's a disaster waiting to happen.

Then you have the totally fraudulent naked short selling of silver contracts by the crooks at JP Morgan. JP Morgan is now being sued civilly and criminally for manipulation of the silver market at the behest of the Federal Reserve. There's no doubt JP Morgan will be found guilty and their silver market manipulation will end. When that happens you can expect not only a massive rise in the price of silver ,but also a decline in the value of the dollar as " helicopter " Ben Bernanke revs up the dollar printing press. This is far far worse than just the 8 trillion in personal and government debt. We're looking at global financial meltdown in the not too distant future.

14 3ReportSpamold man 766 hours agoMost of the comments are not with out some merit. The attitude of most is if you can't afford it don't buy it. I myself adhere to that practice. Here is the problem if we all bought just what we could pay for at the time of purchase how many jobs would be lost. Years ago we made most of our own goods and the money flowed in a circle. We exported the surplus and imported only items we could not produce here. We live in a different world now one I hate to say was of our own making. Feeling very self righteous about how conservative we are will not save the country nor will it change things if we got rid of all the poor, immigrants and old people. Believe what you want but it won't save you in the end. 28 4ReportSpamusual suspects6 hours agoDebt has compensated for stagnant wages. Borrowing to eat. That's a really good sign of prosperity. 21 3ReportSpamThe Fosz6 hours agoAs a great Republican, you do not have to have any accountability. 17 21ReportSpamBull Rider6 hours agoFiat money is a stupid plan anyway. A civilization who's blood and guts depends on a piece of paper with a picture of their slave masters on it is bound to fail eventually. 17 11ReportSpamSath7 hours ago

It all started when we went off the gold standard. We had to have the gold to back up spending. Now we have to have ? to back up spending.

21 13ReportSpamanothername8 hours ago

8 Trillion is way too low, you seem to be ignoring the unfunded liabilities of Social Security and Medicare which together total about 50 trillion dollars. And that’s just the unfunded liabilities for the U.S., other nations have huge unfunded liabilities as well in their Social Security systems.

25 6ReportSpamAgemingle. com8 hours agoOh great article ,Age ain't nothing but a number for these loved-up A-Listers. My BF and I both think so! He is almost 10 years older than me .We met via~~--Ａge'Ｍｉｎｇｌｅ .ＣOM~~ a nice place for younger women and oldermen, or older women and younger men, to interact with each other! Maybe you wanna check it out or tell your friendsthe massive increase in our deficit over the last decade was not enough. We need to continue to increase it, which will benefit us by creating a post WWII economy. Borrow forever, and trust that in some future boom, the government will pay off the deficit. Just trust that the economy will grow enough to pay the interest and entitlements. 1 23ReportSpamlascoma9 hours ago

What the author is suggesting is never going to happen. Pure simple facts are that the cooked up economics system by the moneyed rich, bankers, the power brokers and the Governments themselves is fundamentally flawed with deliberation. No nation in this world has ever balanced the books or the budget. The system is set up for the rich to get rich, poor poorer and the Govts with the aid and abetting of the self interest, self righteous politicians to keep on pyling up debt. Cooking the books, shifting and manipulating taxpayers money, inventing short gap variable, more complex idiotic theories, that look good on paper, but are frauds to pacify the misled and the gullible public. The Goverments operate in secret just as Bush and Cheney did for 8 years with executive privilege with aid, abetting and legal license of the conservative republican dominated US Supreme Court. Reagan's voodoo economics were finally realized and implemented to the hilt by the Mr. MBA nit wit George W. Bush.

Simply put what goes around, come around and now it our (US) turn and Bush / Cheney malignant narcissists, chronic scapegoating, incorrigible grab baggers, with the help of the conservative republican lair, cheat, hypocrite , forked tongued, down right slime bags, shysters

the line was crossed with coercion, reckless abandon and impunity and their is no way out.

23 33ReportSpamDODGuy1239 hours agoA very good article that is absolutely correct but misses on two points. Govt spending should be used to supplement periods of reduced economic output, but that is dependent on a govt that started with a good balance sheet. Govts are supposed to reduce debt during strong economic periods and supplement during weak...that is where the PIIGS and we have gotten into so much trouble, by spending like pigs(ha) even during the good times.Secondly, I wish we had until 2024 to get our balance sheets fixed, in reality it will depend on how quickly other nations get their own budgets under control. Right now we (US) are still benefiting tremendously from world-wide fear and our status as the reserve currency. As other nations pull back from bankruptcy (hopefully), more attention will focus on how the US would survive such calamities as 7% interest rates (shocking!).The most perfect four words is "The clock is ticking", yet all I see are the three wise monkeys (see/Hear/Speak no Evil) still promising everyone can have everything without paying for it. 35 2ReportSpamScott in St. Louis11 hours agoThe solution mentioned in this article is precisely what I've thought for years. "Koo's solution is massive borrowing and spending by the public sector on the scale of what was seen during World War II. Not only did this put an end to the Great Depression, imperial Japan and Nazi Germany, it also led to a new era of middle-cl****sperity and U.S. manufacturing prowess." For an economy and people to prosper, the government needs to support and enable new development and growth that benefits both the country and the people; not just developing overseas markets just so wealthy tiny minority of investors can get rich quick. The reason why the far East and other regions has seen a boom in recent times is their governments along with ours promote and direct positive economic growth which leads to good jobs allowing people and the government to pay off debt and prosper well. The reason why America had a nice run years ago was the US government and corporations together directed a strong economy through promoting industrial manufacturing and business which provided many with good jobs such as how my grandpa had at Mcdonnell Douglas. The job market and debt situation is crap, because we are not positively producing little more than burgers, beer, and financial market numbers with a huge chunk of our spending directly going overseas due to the excessive imports dumping in the USA. We are getting poorer and poorer due to excessive imports and a lack of promotion for further technological development and manufacturing. It's obvious that as the jobs left during the past 15 years, people and the government are bound to become broke, seriously jeopardizing the national security of America. The risk is not terrorists; it's owing other countries too much debt to service while we are further dis-empowered. It's a nasty mix of politics and big business betting against our future and failing us in the name of greed. 31 6ReportSpamLizzyJ12 hours ago

I'm completely debt free. I can't control the U.S.'s debt, I can't control Europe's debt problems. I can only control my own. So that's where my focus is. Sorry to be so boring. lol.

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The extremely wealthy did pay their fair share of taxes . . . when GM went Chapter 11.

Maybe one day we'll have statesmen and not politicians in Washington D.C.

Yeah... right. lol

Businesses have no need or desire to take out new loans. The same goes for people.

Servicing the debt is not an issue. We are going to default. Everybody knows it except Bernanke.

It all started when we went off the gold standard. We had to have the gold to back up spending. Now we have to have ? to back up spending.

the line was crossed with coercion, reckless abandon and impunity and their is no way out.

I'm completely debt free. I can't control the U.S.'s debt, I can't control Europe's debt problems. I can only control my own. So that's where my focus is. Sorry to be so boring. lol.

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The World's $8 Trillion Debt Hole

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