A Debt You Can't Pay

The concept of "Debt" can be confusing to a layman. Most people understand what it means when they take on debt with a local bank, but it can be harder to understand the role debt plays in global economics.

Compounding the confusion, the implications of debt change on a macro level. 

Many worry that our "excessive" government debt levels impact economic stability, the strength of our currency, and unemployment. The national debt can only be reduced through five mechanisms: increased taxation, reduced spending, debt restructuring, monetization of the debt, or default. 

The idea behind our current global debt structure is that if two nations are mutually obligated and dependent on each other, they are less likely to go to war. And that has held relatively true so far. Of course, it's not a perfect system, and it can break down, but as yet, it's working compared to previous systems such as the balance of power.

In some ways, it's fake money, so paying off our debts seems insurmountable. Yet, our economy is reliable so we're allowed to continue borrowing. Debt is also an important part of the economic machine - it can be argued that we wouldn't have money without debt. 

Ray Dalio created a simple (but not simplistic) and relatively easy to follow 30 minute animated video that answers the question, "How does the economy really work?"  Click to watch.

 

via Ray Dalio

To learn more about Dalio's Economic Principles visit: http://www.economicprinciples.org.

The global economy has hugely increased in size in the last 50 years as developing nations prosper. The average global GDP per capita has gone from ~$1000 to over $10,000 in my lifetime.

So it makes sense that the amount of debt is also increasing with the size of the money supply required to conduct all the transactions in the global economy.

The U.S. tops the list with debt to GDP at 104.3% and almost $22 Trillion in debt, but is dwarfed by #2 Japan's debt to GDP rate of 237.1%. 

via Visual Capitalist 

 

Meanwhle, China has increased its indebtedness by $2 trillion in the last two years. 

The market is not the economy. Meaning, the performance of markets is not necessarily linked to the performance of the economy (and the converse is true as well). Even though you may be more interested in trading, economics is still important to understand and follow. 

If one thing is clear, it's that 2020 will be an interesting year for markets and the economy. 

There is a lot of opportunity in crisis and chaos.