GLOBAL FINANCIAL BREAKDOWN CONTINUES: Economic Growth Chokes On Massive Debt Increases

The U.S. and global economies are choking on a massive amount of debt.  While Wall Street and the Mainstream financial media continue to rationalize the skyrocketing debt as merely the cost of doing business, the disintegrating fundamentals point to an economic catastrophe in the making.

Of course, a full-blown economic meltdown may not occur this year or even next, but as time goes by, the situation continues to deteriorate in an exponential fashion.  So, the cheerleaders for higher stock, bond, and real estate prices will continue to get their way until the economy is thrown into reverse as decades of increasing debt, leverage and margin finally destroy the engine for good.

Yes, I say for good.  What seems to be missing from the analysis is this little thing called energy.  The typical economist today looks at the global markets much the same way as a child who is waiting for the tooth fairy to exchange a tooth for a $20 bill.  When I was a kid, it was $1 per tooth, but like with everything today, inflation is everywhere.

Mainstream economists just look at market forces, percentages, and values on a piece of paper or computer.  When economic activity begins to fall, they try to find the cause and remedy it with a solution.  Most of the time, the solutions are found by printing more money, increasing debt, changing interest rates or tax percentages.  And… that’s about it.

There is no mention of what to do with energy in the economist’s playbook.  For the typical economist, energy is always going to be there and if there are any future problems with supply, then, of course, the price will solve that issue.  Due to the fundamental flaw of excluding energy in College economic courses; the entire profession is a complete farce.

Unfortunately, even the more enlightened pupils of the Austrian School of Economics fail to understand the Thermodynamics of value. Instead, we are only taught about SUPPLY & DEMAND to impact price.  While supply and demand forces impact price, they only do so over a short period of time.  However, the primary factor that determines price (for most goods, services, commodities, metals & energy) is the cost of production.  Supply and demand only pull price above or push it below the cost of production trendline.

Regardless, you don’t have to take my word for it, just look at the following charts below.

U.S. Debt Per Dollar Of GDP Growth Goes Ballistic

The days of issuing a $1 of debt to get $1 or $2 of economic growth are long gone.  Most may believe this was a grand conspiracy by the elite to control the masses.  However, it was more a function of the Falling EROI – Energy Returned On Investment and the Thermodynamics of oil depletion.  As the cost to produce oil consumed more energy, well, the best way to offset that was to issue more debt.

The following chart shows the relationship between total U.S. debt from all sectors (public and private) versus domestic GDP:

Total U.S. debt from all sectors is shown in BLUE while the U.S. GDP is in BROWN.  You will notice that the total debt and GDP from 1950 to 1970 remained pretty even.  It wasn’t until after 1970 did the debt increase more than the GDP.  That was due to two reasons

  1. The U.S. Peaked in conventional oil production in 1970
  2. The U.S. EROI of oil fell considerably after 1970

Now, I did not include Nixon dropping the Gold-Dollar Peg in 1971, because that was a direct result of the two reasons listed above.  We must understand that financial and economic policy is a direct reaction to the change in energy…. and not the other way around.

So, for the United States economy to offset falling oil production and the EROI, it was forced to add more debt per Dollar of GDP growth.  In the 1970’s it took an average of $1.5 of new debt for each $1 of GDP growth but then it doubled to $3 of debt per GDP growth in the 1980’s.  However, the escalation of debt really took off after 2000.

According to the data put out by FRED, the St. Louis Fed, the U.S. GDP increased from $10 trillion in 2000 to $19.7 trillion at the end of 2017.  However, total U.S. debt (all sectors public and private) increased from $27.2 trillion to a staggering $68.6 trillion during the same period.  Thus, total U.S. debt increased by $41 trillion versus approximately $10 trillion in GDP growth.   That turns out to be $4 of debt for each $1 of GDP growth.

We also must consider the annual interest expense on the total U.S. debt of $68 trillion to be approximately $1.4 trillion based on a 2% interest rate.  I have no idea what the average interest rate is on $68 trillion of debt and liabilities, but if the average interest rate rises to 5%, then the annual interest expense blows up to $3.4 trillion.  As they say, a trillion here and a trillion there… adds up.

Unfortunately, the U.S. will not have the available cheap energy in the future to pay back this debt.  Thus, as debt implodes, so will the GDP.  Furthermore, if we were to adjust the GDP by the additional credit and debt, it would be a hell of a lot lower than its current value.  But of course, the GDP figures are calculated by the very economists who are taught to disregard energy in their market studies in college.

Global Debt Per GDP Growth Hit A Record In 2017

According to the IIF, Institute of International Finance, total global debt reached a new record high of $237 trillion in 2017, up $21 trillion from the previous year.  Now, compare that to the global GDP growth of $3.9 trillion in 2017, ($75.4 trillion in 2016 to $79.3 trillion last year).  If we divide the $21 trillion of new global debt by the $3.9 trillion in global GDP growth, it equals an additional $5.4 for each new $1 of global GDP growth.

I arrived at the figures in the chart above the very same way as the U.S. Debt per GDP growth chart.  Even though the values in the graph suggest that the debt per Dollar of GDP growth continues to move up at an ever-increase rate, the annual changes are more volatile.  For example, the average global debt per Dollar of GDP increased more during the 2000-2009 period than from 2010-2017. This was also true for the United States.

However, the annual interest expense on global debt of $237 trillion has to be one hell of a lot.  Again, I have no idea what the average interest rate is on that debt, but even if we assume a conservative 2%, that is $4.7 trillion.  How could the world afford $4.7 trillion of an interest expense if the increase in global GDP was only $4 trillion last year???

Please understand, I am only making simple assumptions here.  If the global debt is increasing, so must the interest expense to service this ever-increasing amount of debt.  When the debt service starts to compete with global GDP growth, then we have a serious problem.  And with the impact of the Falling EROI and Thermodynamics of oil depletion, global GDP growth will likely begin to stall over the next few years.

The notion put forth by some precious metals analysts that if the corrupt banking system would be allowed to go bankrupt (as it is bankrupt), then after the pain, the U.S. economy could grow once again.  That will never happen.  Why?  Many in the alternative media and precious metals community still don’t understand the dire energy predicament.  So, much like the college trained economists, they are making the same mistake by analyzing and forecasting the future of the markets without considering energy.

Unfortunately, when the massive amount of debt finally implodes, it will take down the values of most Stocks, Bonds, and Real Estate.  This is not a matter of “IF,” it’s a matter of “WHEN.”  And it seems as if the WHEN is quickly approaching.

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48 Comments on "GLOBAL FINANCIAL BREAKDOWN CONTINUES: Economic Growth Chokes On Massive Debt Increases"

  1. Michael Kohlhaas | May 24, 2018 at 8:14 am | Reply

    Your best article so far!

  2. OutLookingIn | May 24, 2018 at 9:41 am | Reply

    Two faces of debt.

    The creditor and the debtor.
    One holds an asset and the other a liability.
    One cannot borrow without the cooperation of a lender.
    The problem comes when the lender uses the debtors obligation, as collateral for more debt.
    And the debtor uses what little equity has built, as collateral to go deeper into debt.
    Newton’s Law: For every action there is an opposite and equal reaction.
    All “assets” are debt based, the exception being that of physical gold/silver and “tangibles”.
    When the debt based Ponzi does crash, the entire house of cards falls with it. It’s close.

  3. Accoding to a recent Zerohedge article, the economy is already slowing with the increase in fuel prices just like it did in 2008. Prices in parts of Cali ($5), NYC ($6). We are at a point where all this debt will never be repayed and I totally agree with Steve on the energy predicament.

  4. Hey Steve — what are the chances that we will continue to see commodity priced silver in the future (because it is too important for use in electronics, energy, industry, healthcare, etc.) But see monetary priced gold at the same time?

    I see this as a possible scenario because gold can be allowed to go to infinity to wipe out the debt, and because it DOES NOT have many other uses (like silver) that benefit 99% of the population (sorry 1% silver stackers).

    Could we see 100:1 Silver: Gold or maybe 200:1 Silver:Gold in the future???

  5. Canada is C$7,1 for every C$1,- in GDP growth. And they sold all their gold.

    • Because you believe that having 500 tons of gold will change anything ? Stop this gold fetichism…

      • I believe a 7.1 to 1 ratio will change something though.

        • Again RD, we will experience stages of collapse. For “money” insecurity i use physical gold and silver. For the rest i have a few preps. That’s it. I never said gold is gonna save our asses. You either understand, or you don’t.

          • I agree from a personal standpoint. But as a country is considered a few tons of gold will not change IMO.

  6. “How could the world afford $4.7 trillion of an interest expense if the increase in global GDP was only $4 trillion last year???”

    https://en.m.wikipedia.org/wiki/Minsky_moment

  7. Maybe the can can’t be kicked this time. If debt has reached its limit the real cost of energy and resources will destroy the present fantasy economy.

  8. Government Intervention is triggered by a Keynesian belief that aggregate demand can be increased by lower interest rates and by increasing government deficits thereby somehow spurring economic growth. Debt grows faster than income growth and eventually has to be restructured, i.e., everyone loses in the end. Since 2007, global debt has grown by US$57 trillion and it’s had disastrous results. Greece, Detroit, Puerto Richo, Venezuela are just the beginning of this trend. Soon, it will be followed by larger countries like China and United States.
    https://www.perchingtree.com/return-of-great-depression/

    ‘WORSE THAN 2007’: Top central banker warns of looming wave of worldwide bankruptcies
    http://www.businessinsider.com/worse-than-2007-top-banker-warns-of-looming-wave-of-worldwide-bankruptcies-2016-1

    Perfect storm’: Global financial system showing danger signs, says senior OECD economist
    https://www.brisbanetimes.com.au/business/the-economy/perfect-storm-global-financial-system-showing-danger-signs-says-senior-oecd-economist-20180123-p4yyr2.html

    Janet Yellen: A debt crisis is coming
    https://www.washingtonpost.com/opinions/a-debt-crisis-is-coming-but-dont-blame-entitlements/2018/04/08/968df5c2-38fb-11e8-9c0a-85d477d9a226_story.html

    US Economy (GDP) Minus Federal Debt
    https://seekingalpha.com/article/4109827-depression-borrowing-money-income

    China central bank chief warns of ‘Minsky moment’
    https://www.ft.com/content/4bcb14c8-b4d2-11e7-a398-73d59db9e399

    The world is drowning in debt, warns Goldman Sachs
    https://www.telegraph.co.uk/finance/economics/11625406/The-world-is-drowning-in-debt-warns-Goldman-Sachs.html

  9. A common mistake is to think that, since the end of the gold-backed dollar, the $US is not backed by anything. I like Steve Ludlum’s(economic-undertow) explanation of this: that since 1971 the dollar has been backed by oil. He goes on to say that this has fundamentally changed our behaviour, I’m paraphrasing, because gold nature is to be stored or hoarded and, as we know, oil’s is the opposite: to be burned or destroyed. Comeplete opposites,no?!

  10. oil is the energy of slaves, gold is the energy of kings.

  11. Another outstanding article. maybe your best because it sums up the entire problem succinctly.

    Thanks for all your work. Just wish at least some of our politicians would read and understand your work but is not to be. The message is too dire for a truthful discussion and 95% of the world’s population are either too stupid or too complacent to care.

    • DisappearingCulture | May 27, 2018 at 2:27 pm | Reply

      “Just wish at least some of our politicians would read and understand your work but is not to be.”
      Politicians consist of a few true believers [like a few new to Washington], and the rest are just figuring out how best to ride the lucrative, status-providing gravy train.

  12. [Is] The U.S. and global economies are [really] choking on a massive amount of debt [or it is only Analysts and the Media who are?].

    Since 1970’s, when wealth creation has been officially decoupled from resources, debt became, practically, the only money reserve people can draw from.

    However, since then, Analysts overlook the fact that the new global economic contract became in that Energy supplies will be made available on the developed-world market cheaply and in abundance – pushing, in effect, the value of real man-hour rates to 1c, preventing the majority from ever becoming self-sufficient, financially.

    In return, uncapped debt will be provided and distributed centrally, to keep the global economy tamed and functional, creating Wealth synthetically and selectively, in the process.

    It is how smart are some individuals and commercial bodies to position themselves privileged-enough to draw from that debt-reserves, not any others – is what makes the economy and wealth tick today, not classic economics – a.k.a the Social Darwinism In Action.

    Tesla vs Greece, can be seen an example of this reality.

    Therefore, the size of the debt has been rendered a constraint only applicable to the working class.

    A proof of this reality is if one divides the total sum amount of all global debt known, over the price of a barrel of oil, humans require many folds of all the crude oil extracted since 1860, to be converted into useful energy, in order to pay off that debt – which violates physics, as depicted here in a couple of online thermodynamics diagrams.

    This is why most classic Analysts became no better than fortune-tellers hanging on analysing legacy, old, obsolete parameters like what is called debt!.

    The obsession of all media channels with relentlessly podcasting depressing news on ‘debt’, while the population is made powerless in addressing that debt, is another well subsidised campaign of spreading trauma, like many others seen today.

    • Reading this comment I made, after submitting it – I am really finding it an almost exact, and unnecessary, repeat of what Steve has just sensibly and brilliantly written in this post.

      Thank You Steve, please keep these distinguished articles coming.

  13. Keep raising them interest rates higher faster. Go Powell go!

  14. Wow!! This for me was the best article that you have written. It can’t be more clear and still almost nobody talk about this topic. I feel lucky to have found your page. Thanks!

  15. Excellent article yet again.

  16. Robert Happek | May 24, 2018 at 11:57 pm | Reply

    To understand the deeper reason for the debt buildup, one needs to answer the following two questions:

    1) What would happen if governments would stop issuing new debt ? What would happen to the real GDP in such a scenario ? How large would be unemployment ? How many people would be starving (unemployment benefits are paid via the issuance of debt) ?
    Do we really want people to starve in order to stop the debt buildup?

    2) Issuing debt means that the economy as a whole consumes more than it produces. Now some people produce more than they consume. Therefore, the question is: Who is consuming more than he or she is producing ? Are these people evil ? Are these people not able to produce anything ? Or is it that the market does not demand their labor and their products ? Should the economy be forced to pay for everybody’s work ?

    Answering these types of questions brings us closer to the truth about the rising debt levels. Ultimately, it is not about money and debt. It is about people and their productivity.

    • Debt = growth. Without debt, no growth, and without growth no ability to pay back current debt. So there’s your mathematic certainty of implosion of all fiat currencies.

      • Exactly, debt must continue to grow as our money system demands it and it’s not just the US, it’s every economy around the world doing it as well. It’s no wonder that regardless of who’s in charge of the House or Senate the debt is always raised. It has to, there is no choice or the entire global economic system collapses.

        I like Gail Tverberg’s illustration of Leonardo’s Stick Toy. As she explains, the entire global economic system is complex, interlinked and intertwined. If you remove just one stick you risk the entire structure collapsing.

        https://ourfiniteworld.com/2018/05/11/how-the-economy-works-as-it-reaches-energy-limits-an-introduction-for-actuaries-and-others/

        • Yes Rodster, that’s a good one indeed. We used debt to build it all, and cheap surplus energy made it possible to grow and pay back the debt. Now the energy surplus is gone, and with that, the ability to grow. Only monetary stupidity like 100 year bonds, QE, ZIRP etc etc is what keeps this world elevated. For now. Diminishing returns will kill it off eventually. More signs of problems pop up as we speak. We won’t make it to 2025 if you ask me. We will be chopping wood instead of driving Tesla’s if we’re lucky.

          • I always lol when politicians yell…BALANCE THE BUDGET !!!!

            You can’t because the money system we’re using demands the complete opposite. As far as 2025, I don’t know or can’t say but as Chris Martenson like to point out, it’s a mathematical fact something bad is going to happen because of our global money system which the entire world is using. That’s why Hank Paulson during the 2008 collapse urged President G.W. Bush to intervene and not let the global financial system to unravel as it would have meant a total collapse of the global economic system and the US would have had to implement Martial Law.

  17. Strange but real dynamics to where the world is heading. Include water shortages, war and pollution into the equation and then try not to think about it. I suppose there is isn’t much one person can do for the world but he could prepare for his family and a couple of generations maybe a bit.

  18. You want to see the future of the west just look at Venezuela where the Government “managed” to get rid of all their liabilities. Energy in Venzuela is no issue as they are sitting on one of largest crude reserves in this world. It is more that the us govt needs desperately control the oil/gas reserves of other nations (Lybia, Iraq, Iran).

    Hilarious what the usa demands from Iran no independant country in this world would ever accept that only the vazal states (most countries).

    We will continue on the path of creating more debth as it can no longer be reversed we are so far on this road. So expect more of the same so the preferred solution as it always was by govt is to continue debasing the currency. This is the price to be paid when you run your country by central banks which are only in business for the 0.01% of
    the population.

  19. Steve, When you come across these facts in which you put as an example into a graph or some other visual description, do you sometimes sit there stunned at what you’ve just discovered?

    • slvrwllwn,

      Every time I believe “I GOT IT ALL FIGURED OUT,” something new falls into my lap. Well, that really isn’t the correct way to put it.

      When I do the research, and I do a lot of it, I do get quite surprised when the results aren’t what I first imagined. So, yes… these realizations are just as NEW & SURPRISING to me as they are to my readers and followers.

      Furthermore, the more I learn about our Alternative Media Investing Community, the more surprised I am how different a large percentage of them are compared to what I thought five years ago. And when I say, DIFFERENT, I don’t mean in a positive way.

      So, I will be writing about that in the next group of articles.

      steve

  20. The $4.7 trillion in debt interest goes somewheree! It goes back into the system (to the Banksters) who create the money/debt from thin air. This is how they enrich themselves at everyone else’s expense – they are parasites. They will continue this until it all blows up, who knows which straw will break the camels back!

    • Ian,

      While some of the estimated $4.7 trillion of interest payments go to the bankers, a lot of it goes to PAY the typical JOE BAG OF DONUTS his retirement. A lot of that interest expense goes to fund the global retirement community, not the bankers.

      steve

      • USA collects about $1.5 trillion in personal taxes each year…..almost this entire amount goes to defence spending and interest payments…..how good does it feel that they skim off a percentage of your hard work but you see no benefit.? Any benefits you do see come from other revenues like company tax, import duties, etc

      • Joe bag of donuts will eventually default on himself. No one knows exactly how this ends but this practice of borrowing from future generations will come to an end

  21. Excellent article again. Such sad information about the factors involved in the trajectory of our economy and civilization. My favorite article (several years ago)involves your explanation of EROI and how energy is a major driver in the progress of civilization. Your excellent research is why I am glad to support your site.

  22. “Until you change the way money works, you change nothing.”

    • David,

      That used to be true. Now, its until you understand ENERGY, you won’t understand how money works.

      steve

  23. Joseph Sherman | May 25, 2018 at 6:07 pm | Reply

    Steve,
    I love your articles and this one is no different. The idea of connecting EROI to debt is nothing short of brilliant.
    Keep going!

  24. -Now, I did not include Nixon dropping the Gold-Dollar Peg in 1971, because that was a direct result of the two reasons listed above. We must understand that financial and economic policy is a direct reaction to the change in energy…. and not the other way around.-
    Touché mr. St. Angelo ! You couldn’t have been clearer.
    John Michael Greer in the famous Archdruid Report has written a lot about the calamitous state of economics. I share his vision that nowadays macroeconomics is nothing more than a kind of theology. The discussions between macroeconomists can be compared with the discussions of 16th century theologians about the true nature of the holy trinity. These discussions may have internally consistent arguments but they don’t have any relation with the ACTUAL physical reality of the world. And like the christian faith was useful to powerful people in the 16th century the current macroeconomics ideas are useful to protect the interests of rich people. The Austrian School of Economics is a good example of a religion designed to protect the status quo and the oligarchy.
    And if you point their defficiencies to macroeconomists they usually react like inquisitors, incapable of escaping from their long list of mistaken axioms.

    Anyway, thank you mr. St. Angelo for this clarifying and brave post. Have a good weekend.

  25. The common man on the street controls everything, but he knows nothing…..go figure.

  26. Yes to energy and its importance. We knew from the late 50s that petroleum was thought to have a future defined by a form of the bell curve.
    All the “low hanging fruit” gets picked first and then it progressively becomes more expensive to find and produce replacement reserves.
    Normally, a correctly functioning global market in energy would provide for substitution but with industry and economic /wealth concentration so pronounced, corrective measures tend to get suppressed by the established interests who invariably work to spin out their economic worth as long as possible.
    Generous amounts of low cost energy, has in parts of the world served up an unsustainable standard of living that those enjoying it are very unwilling to give up.
    If the current population for the planet stands at 7. 5 billion, by some estimates, it must be challenging the carrying capacity of Earth and the energy needed to sustain that amount of human life.
    A correction to wealth concentration took place at the start of the 1900s when there were 2 world wars.
    It would not be unexpected to see a similar rebalancing of global population and redistribution of global wealth, particularly now with the petroleum/energy issues spoken above.

  27. Hey Steve! Another great article. Scary stuff though! Especially the part about.. “not a matter of IF but WHEN…” Yikes!

  28. https://www.zerohedge.com/news/2018-05-28/brazil-trucker-strike-worsens-petrobras-workers-plan-walkout

    Truckers in Brazil are on strike over a 50% fuel spike in the last year. The military was called in to unblock the roads. The article also states Petrobras workers go on strike May 30th. I guess this is how the EROI end game starts.

  29. The real numbers are much worse than what Steve presents:
    1. The government debt doesn’t add to the GDP. If anything it reduces it.
    2. The GDP calculations changed over time and now it much more overstates it. So the real number is much lower.
    3. Inflation is way higher that what the government says. So real GDP is much lower.
    4. What matters is GDP per capita not gross GDP. A lot of the GDP growth is due to a growing population but that’s no good if your individual standard of living is decreasing.

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