Global GDP Still Propped Up By A Massive Amount Of Debt

While the government agencies and economists continue to publish strong GDP figures, they seem to overlook how much debt it took to produce that growth.  Or should I say, the “supposed growth.”  The days of adding one dollar of debt to get one dollar of GDP growth have been long gone for more than 40 years.  And, as global debt has increased, it has forced governments to lower interest rates.

Yes, it’s really that simple.  I get a good chuckle when I hear analysts talk about rising interest rates to 10-15%.  If the U.S. Government interest rate on the Treasury Bonds increased to just 5%, Uncle Sam would be paying over a trillion dollars a year just to service the debt.  So, no… we aren’t going to see 10-15% rates again.

Well, we could… but, most of the global debt would have to collapse or be forgiven.  Unfortunately, if global debt vaporizes or is forgiven, then the entire economy collapses as well.  We must remember, GDP growth is also driven by oil production growth.  There is no way in HADES that the oil industry can fund future production with 10-15% interest rates.  IT JUST AIN’T GONNA HAPPEN.

Why?  If it weren’t for the Fed dropping rates down to nearly zero, the Great U.S. Shale Oil Ponzi Scheme and the six million barrels per day of unprofitable shale oil production would have been a pipe dream.  I can assure you that the shale oil industry could not fund operations or service their debt with 10-15% interest rates.

Most shale oil companies are paying on average between 4-5% interest to service their debt.  If the companies’ interest rates double or triple, then it would make it extremely difficult to service the shale industry debt that is estimated to be $280-$300 billion.

However, this article isn’t about the about the Great U.S. Shale Ponzi Scheme; rather it’s about the global debt bubble propping up the economy.

Global Debt Increased More Than Five Times The GDP Q1 2018

According to data from the IMF and the Institute of International Finance, global debt increased four times more than the GDP growth during the first quarter of 2018.  The IMF forecasts Global GDP to reach $84.8 trillion in 2018 and the Institute of International Finance reported total world debt increased by $8 trillion in the first quarter of 2018.  Thus, I estimated that Q1 2018 GDP growth was $1.3 trillion, one-quarter of the $5 trillion increase from last year.

So, the world is now adding an astonishing six dollars of debt for each dollar of GDP growth:

Now, this is just an estimate as the quarterly GDP dollar figures aren’t released, but the debt is still rising at least fives times more than the GDP.  It is quite amazing to see the global debt increase at such a rapid rate.  The following chart (courtesy of Bloomberg), shows how much the global debt has grown over the past 15 years.  However, since Q1 2008, global debt has jumped by more than $70 trillion.

Thus, the average annual global debt increase is approximately $7 trillion.  So, to see world debt balloon by $8 trillion in the first quarter of 2018 shows just how much more the Central Banks are motivated in propping up the markets.

On the subject of Central Banks, the U.S. Government continues to rack up its public debt which has now reached $21.7 trillion… up $1.2 trillion since the same period last year.  As I have mentioned, rising debt and interest rates forces Uncle Sam to pay a great deal more to service the debt:

Now that the U.S. Treasury has to pay more than a half trillion just to service its debt, I hardly doubt the Federal Reserve is going to allow rates to rise above 3% anytime soon.  According to the TreasuryDirect.gov, the interest expense of $31.7 billion paid for October jumped by a stunning 30%, compared to $24.4 billion during the same month last year.

Even though $7 billion of additional interest expense in one month doesn’t seem like much compared to the trillions of debt being added, it adds up to a lot of stuff:

$7 billion = 30,000 homes (valued at $232,000)

$7 billion = 200,000 cars (valued at $35,000)

$7 billion = half annual Global Silver Mine supply

And again, this is just the additional U.S. Government interest expense for one month.  Unfortunately, Americans have become oblivious to the staggering amount of debt in the system.  Furthermore, the public and investors are also immune to the tremendous volatility taking place in the markets.

For example, one of the industrial bellwethers of the Dow Jones Index, Caterpillar, has seen its share price go into cardiac arrest over the past six months:

Caterpillar hit a high of $170 at the beginning of the year and a low of $112 last month.  That is a 34% correction in a little more than six months.  Moreover, if you look at the candlesticks on the upper right-hand of the chart, you will see the tremendous volatility not experienced in the past ten years.

In crazy October, Caterpillar’s stock traded between a high of $159 and a low of $112.  That is a $45 movement from one of the leading manufacturing blue-chip stocks in just one month.  Caterpillar is not supposed to trade in this manner, but this is the NEW NORMAL in a market that is about to go HOG WILD.

While the broader markets corrected higher from the lows last month, investors should not think the worst has passed.  Oh no… the worst is yet to come.  Nothing goes up or down in a straight line, but this economic cycle is nearly ten years long in the tooth and at some point will need to correct back towards reality.  Caterpillar will likely have to fall back to its 200 Month Moving Average of $62, which is more than 50% lower from where it is trading today.

Forecasts For Much Higher Global GDP Growth By 2023 Means Gobs More Debt

The IMF forecasts that Global GDP will reach a staggering $108 trillion in the next five years.  However, for Global GDP to rise by $23 trillion by 2023, then it makes sense that total world debt must also increase by at least 4-5 times:

As I have shown in prior articles, the world has been adding between 4-5 dollars of debt for each new dollar of GDP growth.  If we assume the same with continue over the next five years, then world debt will have to jump by $100 trillion.  Now, if we also consider a conservative 3% interest rate to service this $100 trillion of additional debt, the world will have to pay a mind-blowing $3 trillion a year, JUST TO SERVICE THE NEW DEBT….. LOL.

Lastly, the Central Banks will continue doing what they do best, and that is print money and kick the can down the road.  Unfortunately, the debt and interest expense are getting to a level that is not sustainable for another decade.  And if we add the coming disintegration of the U.S. Shale Oil Industry, Americans won’t have the growing energy supply to drive GDP growth.  This is another factor not taken into consideration by economists.

IMPORTANT NOTICE:

I wanted to apologize to my subscribers and followers for the lack of articles this past month.  There has been a lot going on here, especially after the mini tornado did a great deal of damage to the property.  However, the mess has finally been cleaned up about 90%, and I will be returning to publishing 2-3 articles a week.  I also plan on putting out some new videos as well.

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34 Comments on "Global GDP Still Propped Up By A Massive Amount Of Debt"

  1. “While the government agencies and economists continue to publish strong GDP figures, they seem to overlook how much debt it took to produce that growth. Or should I say, the “supposed growth.” The days of adding one dollar of debt to get one dollar of GDP growth have been long gone for more than 40 years.”

    That’s because industrial civilization including our complex “Just in Time” delivery system was designed around cheap and affordable energy. Now we have oil prices bouncing up and down like it’s jumping on a trampoline because energy cost more to produce. And when the price goes up especially at the pump, prices rise and energy demand goes back down. The average consumer who’s already feeling the pinch with rising inflation and stagnate wages can’t afford higher fuel prices to power their SUV’s and drive to their local Walmart’s and Costco’s.

    So demand drops and the price goes back down, rinse and repeat. As Gail Tverberg likes to point out is that we have reached a point where energy prices are too HIGH for the consumer and too LOW for the producers. So the only real way to increase GDP is by issuing debt and lot’s of it. If you take Global debt, add global unfunded liabilities and add global derivatives you are looking at a number in the quadrillions.

  2. Glad you are well and the property has improved. You provide a great service. We are fortunate.

  3. Nothing to worry about. Bo Polny told me years ago that the global debt problem will be solved by a global debt jubilee based on the recommendations found in the book of revelation. After that there will be a giant comet that will take us to the kingdom of heaven where money losses its value and cookies fall from the trees every morning.

  4. “supposed growth”

    We may count on the Fed doing the right thing at the wrong time!
    Like now, raising rates and tightening going into a looming global recession.
    The World Monetary Base (global liquidity) has been contracting. Based on the past 45 years of data when the WMB contracts, the world enters a dollar liquidity crisis, followed soon thereafter by recession. We are now there.
    Emerging markets who are primarily commodity producers that borrowed in dollars, are now having a hard time, struggling to pay back dollar based loans with their devalued currencies.
    As are those who lent them those dollar based loans, which can be noted in recent bank share prices.
    The Fed is risking an uncontrollable rise in the US dollar (which is happening) and a consequent collapse of the fixed exchange rate systems. A worldwide recession is not only imminently possible, but more likely probable very soon.

  5. We re in the middle of a secular stock bull market which usually last 20-25 years. Assuming that it stsrted in 2009 its projected end falls on 2030. In such environment PM cannot shine which does not mean that a minor rally cannot happen in 2019.

    • Ed,

      There has never been a 20-25 year STOCK BULL MARKET. Maybe you should look at the 7-10 year cycles that have taken place since 1900 so you don’t make silly comments.

      stevev

  6. Ed, please go back to school you troll

  7. The only way for stocks, dear Ed, is up. Because that’s our current system. Stocks, too, will have their Minsky moment though.

    And, dear Ed, i am sure you will get out in time. Just before all others. The sky is the limit. When stocks reach parity with printing, and we are already beyond that point, but not for all to see (yet), you, too, will reach for that wet finger in your left ear.

  8. Here are the charts http://learnpowertrader.weebly.com/
    Silver is in trouble again having broken a lowering triangle and is now in a downtrend. Unless there is a big up day on Monday 11 dollars is possible. I am kicking myself for buying physical at 14.2 should have waited. Bad call.
    Gold is still in a uptrend but the uptrend is weak if it breaks the flag 1000 dollars is possible.
    Bitcoin is in big trouble with a widening bearish triangle. If it breaks it could be a big fall.
    S and P looks like it is forming a head and shoulders. If so March or April could be a good time to short if it breaks the neck.

  9. Steve, I don’t know if i’m the only one but I can only create messages and not reply to them. I’ve tried it with different browsers, same results.

  10. Now is the time to invest in things other than the U.S. dollar, as it is weakening by the day. Most investors suggest precious metals like gold or silver. I try to stay on top of the market analysis and see when is the best time to buy. https://bullionexchanges.com/blog/category/weekly-market-analysis/

  11. Barry –

    I find charts useful, only to the degree of establishing patterns.
    Something like casting chicken bones, then devining the results.

  12. So the government has to pay over 500 billion just to service it’s debt,.. but who do they have to pay that to? The Fed?

    Thanks in advance

  13. If you didn’t post for months Steve, you’d still have my support. It’s the quality of your essays, not the quantity. SRSRocco Report is a public service.

    I agree that rates can’t rise significantly (or, maybe not all, without hidden offset) or the process will snap. Agreeing also with Outlookin, and continuing in that vein, rising rates appear to be the plan. Combine that with trade war, which may be a strategic necessity, and it seems the die is cast. Even if reflation is the plan, impossibly notwithstanding, a massive drop would be the political catalyst.

  14. Referring to a monetary process, rather than a monetary system, I’m borrowing from an essay I read years ago by Hugo Salinas Price. In that article he pointed out that a system has checks and balances – a steam engine has gauges and relief valves. Whereas an explosion is a process, a process of rapid expansion. Once the process stops, it collapses. Hadn’t thought of it in years. Seems a relevant comment tonight.

  15. This cycle of stock market expansion does not end in 2019. Even if silver goes to $30 next year, it will be temporary. You will have to wait several more years to see silver soaring to $50 and beyond. The collaps of the current economic system is inevitable, but not now. That is may point.

  16. Yep, save some precious metals, pay off bills, keep mouth shut. Consider what may NOT be available later even if you had the means to buy it.

  17. No one hurt in “little tornado” I hope. All (90%) is well with are persons in your life?
    As Art Berman says, “Energy is the economy!”, and you are right to bring that to our attention every time along with the other stupidity of debt accumulation.
    Thank you for coming back.

  18. In line with what Steve wrote. China has used MASSIVE DEBT to generate GDP and according to a Zerohedge article they are faced with unused apartment buildings that are rotting. But China has to keep the illusion going that infinite growth on a finite planet doesn’t matter.

    “The “Nightmare Scenario” For Beijing: 50 Million Chinese Apartments Are Empty”
    https://www.zerohedge.com/news/2018-11-10/nightmare-scenario-beijing-50-million-chinese-apartments-are-empty

  19. I agree with this article Steve that the US government cannot allow rates to go above 3-4%, we all know they want to raise rates so they can drop them back down to zero when the next recession hits to ‘stimulate’ the dead corpse of an economy they’ve created.

    But obviously everything goes through cycles. That means interest rates should rise since they’ve been held down artificially through repression via the fed. And since treasury cannot allow rates to go above 4%, something else will break somewhere else.

    IMO capitalism is dead, replaced by the artificial rates created by the central banks. That will have its own set of consequences later on, which they will try to remedy with more intrusion in the debt markets. The more they play this game the worse the problem becomes.

    Glad to have your articles again, I check this site almost every day.

  20. We should remember that Debt ≠ Debt. It depends how money is spend.
    The bad news is we are going to be liable for it and they spend without our knowledge and approval.Here link and another example – https://www.youtube.com/watch?v=WeZVYst0IMY
    What happened to former Greece , Argentina , Pourto Rico Governments – nothing.

  21. OutLookingIn I find charts useful because they make me lots of money.

  22. The global debt is a major issue that people need to be paying more attention to. I agree with the poster mentioning that having national debt is important, but the negative about it is them spending money we’re on the hook for without our knowledge or approval. That’s why it’s so important to have elected leaders we can count on, but that doesn’t seem like it’s in our future. I read this market article recently about standings of gold and silver and the market as a whole, it’s important to stay on top of that as citizens so we’re prepared for the worst. https://bullionexchanges.com/blog/2018/10/15/market-tremors-gold-and-silver-shine/

  23. Unfortunately both global and national debt is required to keep the system functioning. That’s based on the money system our elected leaders chose on Jekyll Island back in 1913. Our money system is one giant ponzi scheme that “REQUIRES” exponential growth i.e. debt or the monetary system stalls and goes in reverse. And all the Gold and Silver in the world will not fix the problem because our monetary system thrives on debt which is how the Shale Oil Boom came about.

    The only way to change things is to replace the entire Global Economic and Monetary Systems with something entirely new. It won’t happen because those at the top want to keep their wealth and more importantly, power.

  24. This note may be more relevant to your prior article, “U.S. SHALE OIL INDUSTRY: Catastrophic Failure Ahead”. However, I just read the article at https://seekingalpha.com/article/4221292-7-things-watch-investing-gold-miners that details why gold miners are, in general, way over priced. Of course, it may well turn out that investors in gold miners will remain naive so if the price of gold ever goes up, miners will explode in value. However, it’s good to know the risks. Actually, that analysis is very bullish for gold because if gold miners are really NOT very profitable (Where are the juicy dividends?), then some day, not far off, that will mean the price of gold will need to rise or miners will stop seeking more mines to develop and/or go bankrupt which will reduce future supply.

  25. A bit off topic, but I wanted to introduce another way of looking at golds enduring value.
    We often hear that one ounce has always bought a mens suit, but that doesn’t resonate with most of us.
    I live in an old copper mining town in the southwest, and one hundred years ago the wage of a top underground miner was $5 per day, or a $5 gold piece, which is 1/4 ounce.
    A quarter ounce of gold is worth roughly $320 today, which is $40/hour, or $80k per year. Which is still the wages of a top industrial worker.
    Therefore, wages measured in gold have stayed constant for a century!

  26. Why can’t interest rates rise above 3-4%?
    What’s to stop them from just borrowing more money to pay the interest?
    As far as I see, government debt is not really debt at all. What it really is is a representation of money printing. Interest rates will go as high as they want them to go.

  27. DisappearingCulture | November 13, 2018 at 8:46 am | Reply

    “As far as I see, government debt is not really debt at all.”

    I’m seeing some very uninformed comments about government debt. Remember it is also called Treasury BONDS, which they have to SELL, and they have to convince big funds & countries to BUY. And there are market dynamics here.

    Steve, please tell your readers at some point debt DOES matter, and you can’t just make it all magically go away by thinking about it in a fanciful way. At some point things like accounting details matter.

  28. Michael Kohlhaas | November 13, 2018 at 2:01 pm | Reply

    Now everybody can see that there is no correlation between a stock market going down and precious metals going up. Both are going down at the same time.

  29. Debt doesn’t matter. All debts can be inflated away by the printing presses, which they will use.

    At some point down the road, maybe it’s 10 years away, maybe 50, maybe 100, who knows, the system will reset and mostly we will go back to local currencies and credit systems, without much in the way of global trade. Nobody will even care about what happened to us.

    That’s the brilliant thing about the system. It can always morph and change over time. Most people who complain about the system are idealists. Why be an idealist? Humans are a lost cause and have been since the dawn of time, or have you forgotten your Bible (or Darwin, same difference).

    Most of us lucky to even have food on our plates and some shelter over our heads.

  30. “I’m seeing some very uninformed comments about government debt. Remember it is also called Treasury BONDS, which they have to SELL, and they have to convince big funds & countries to BUY. And there are market dynamics here.

    Steve, please tell your readers at some point debt DOES matter, and you can’t just make it all magically go away by thinking about it in a fanciful way. At some point things like accounting details matter.”

    DisappearingCulture- Hello. Interesting start on subject, then you drop ball in Steve’s court. If you really understand it why ask for his help?

    Anyway, must weigh heavy on a guy. all those seemingly well researched articles proving the cost of production, and thus spot price,
    couldn’t drop at the lowest extreme below $15 and more likely was $16-$17. Why acknowledge or explain?

    Maybe he’s off trying to teach an extremely reluctant Tom Cloud about cryptos. stay tuned. It’s all in the family.

    Hope you didn’t go all in on the metals bro. If you did, and you’re young enough that it it matters, maybe this little tune will cheer you up.

    Ultimately, I think, it’s impossible for everyone not to be wrong most of the time.

    Youtube Stotinkica, Neil young, crazy horse, into the black

    Party on

  31. When all this debt driven economy falls like a house of cards there will be much pain and people will try to find answers and comfort. Are we going to return to the old draconian laws against usury ? Or the system will try to keep praising the lenders ? I think in a few decades our beliefs in the economy will have changed deeply. Because there is no way in a no growth economy that the financial system will go unhurt. Are the Wall Street usurers going to recycle themselves as new feudal lords ?

  32. I have come to the conclusion that Dolph is a “Troll”.

  33. DisappearingCulture | November 14, 2018 at 1:15 pm | Reply

    Frank,

    “Interesting start on subject, then you drop ball in Steve’s court. If you really understand it why ask for his help?”
    It’s his blog.

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