In his latest commentary, Michael Pento writes “there is a reason why the Fed and other central banks have been unable to achieve a healthy and viable economy even after five years of trying to manufacture one from a printing press. The truth is an economy that is soaked in debt just doesn’t grow because it is always marked by at least one, if not all three, of the following growth-killing conditions; high interest rates, rampant inflation and onerous tax rates.”
When debt levels increase to an extent that they are equal or greater than its GDP capital flows out of the private sector due to burdensome rollovers and interest payments on that debt. Penton continues: “In addition, rising tax rates act as a disincentive to increase productivity and whatever money that is taken from the private sector is always redeployed in an inefficient, GDP-destroying manner. Rising interest costs also discourage borrowing and lead to capital shortages. And finally, inflation destroys the purchasing power of the middle class by eroding the value of the currency and leaving consumers with an inability to make discretionary purchases.”
Now how high is our debt actually? We know meantime the indebtedness per country with Japan as the big winner with a government debt to GDP ratio close to 220% (source). But what about the global indebtedness? The Wall Street Journal provides some details about the world debt levels.
$223.3 trillion is the total indebtedness of the world. It includes all parts of the public and private sectors, amounting to 313% of global gross domestic product. The world GDP was some $70 trillion at the end of 2012.
- In developed economies debt amounted to $157 trillion, or 376% of GDP.
- In emerging markets debt totaled $66.3 trillion, or 224% of GDP.
“The $223.3 trillion in total global debt includes public-sector debt of $55.7 trillion, financial-sector debt of $75.3 trillion and household or corporate debt of $92.3 trillion. (The figures exclude China’s shadow finance and off-balance-sheet financing.)”
An important figure from these data is the $55.7 trillion representing government debt. As discussed above, the government debt worldwide is already 80% of the global GDP. The global governmental debt level is ridiculously high and close to a system problem even from a global point of view (not only in a group of sovereign nations). There is a reason why the debt crisis continues and is often called a train accident in slow motion.
This is related to gold in a direct way. The bigger the debt problem, the higher the counterparty risk, the higher the value of precious metals (in physical form). We wrote earlier that government and central bank intervention leads to distorted market signals. “What can be said is that governments can’t create trillions of new currency units without consequences. Therefore we believe it is important to focus on the big picture and not get lost in the details. Debt is the biggest issue! The leading nations of the world such as the US, UK, European Union and Japan are facing the highest level of public debt in times of peace. In addition to these high levels of debt there are unfunded liabilities which are also exploding, the aging population and increasing unemployment. Our financial system is simply not sustainable.” (source: Debt is the biggest issue)
More on the debt issue and how it relates to gold? This video (which is featuring Nick Barisheff) is a must: US Debt and Gold – A perfect correlation.