Worldwide debt... and what it means to you

By Mike Jones, posted November 21st, 2014

In a comprehensive report on global debt, ING economists reported that total world debt now exceeds $223 trillion.*

Yes, the debt super cycle lives on.

This number includes the sum total of all debt: government, bank, corporate and household. To put that into perspective, the approximate value of all the world's stock markets is a mere $70 trillion.

Numbers of such magnitude might cause one to ask the following questions:

What does this mean?

Numbers are just numbers, and out of context they really don't tell us anything at all. To get to the true meaning of these figures, one must look at the sum total of economic activity required to create the funds necessary for the obligatory payback. Worldwide GDP in 2014 is estimated to be around $71 trillion, making the worldwide debt-to-GDP ratio 313%. At first glance that may seem horrendous, but it's essentially the equivalent of a banker allowing an individual making $71,000 a year to qualify for a loan of $223,000.  So yes, while that is a big debt number, there is plenty of underlining revenue to service it and pay it back as long as the cost of that debt doesn't rise too much. 

How did this happen?

For the sake of brevity I will simplify the reason I believe debt has exploded around the world. I believe there are 3 culprits: (1) Central bankers have chosen to expand their balance sheet and buy massive amounts of debt in order to stimulate economies back to a state of health; (2) Banks have issued more debt (especially Europe) as regulators have allowed them to count some of that debt as capital; and (3) Corporations have issued debt because, with interests rates so low, they believed it to be in their shareholders best interests. 

What are the implications of all this debt?

Actually, we don't know. We have never been down this particular road before. Some say that inflation and high interest rates lay in wait. Others warn of deflation. All I can say is that which can't happen won't happen. Think about it. If interest rates went to 7% on $230 trillion then the world would have to allocate over 20% of GDP to interest payments alone. No economy can survive that load.

Like it or not, I believe that low rates are here to stay for quite some time. 

^{*Number of the Week: Total World Debt Load at 313% of GDP}

Mike Jones is Managing Director / Investing Group of Argent Advisors, Inc. Email him at mjones@argentmoney.com. Write to him at 500 East Reynolds Drive, Ruston, LA 71270 or call him at (318) 251-5844. The opinions of any single advisor do not necessarily reflect the opinions of Argent Advisors, Inc.  No forecasts can be guaranteed.  Argent Advisors, Inc. does not offer tax, insurance or legal advice.  The information contained in this column should not be construed as a substitute for personalized investment, tax, insurance or legal advice.