You may well have seen in the news the last couple of days that global debt has reached another all time high. After climbing to an astonishing $247 trillion when combining public debt of around $60 trillion and non-financial sector debt of about $186 trillion. This eye watering figure also means that for the first time ever there is now officially 3 times more debt in the world than money.
It has been reported that this astounding level of debt is causing major cause by investors on top of ongoing concerns about the Federal Reserve’s monetary policy.
Is the global economy coming to an end?
According to the CIA, the total amount is $80 trillion if you include “broad money.” Broad money its not exactly physical cash but rather accessible cash so things such as checking accounts, savings accounts, money-market accounts. Anything which is not considered physical but you can make a bank transaction digitally and use that as money,
If you include this figure then total estimated value of all the money in the world is $80 trillion. The figures pales into insignificance when compared to the aforementioned global debt figures.
3 Times More Debt In The World Than Money
CNBC & Bloomberg have reported the news of this increase in global debt figures, it is also claimed that this figure has rose $29 trillion since 2016. Meaning for the first time ever there is 3 times more debt in the world than money.
How can there be more debt than money?
When banks hold your money, they understand that only a small fraction of people will need to withdraw their money at any one time. Because of this, the banks are able to loan out up to 90% the money they have on deposit to other parties. This process is called Fractional Reserve banking and has been going on for centuries.
If too many people try to withdraw their money at the same time, the system would collapse like what happened in the Great Depression, where many banks were forced to shut down.
“The term fractional reserve refers to the fraction of deposits held in reserves. For example, if a bank has $500 million in assets, it must hold $50 million, or 10%, in reserves. Analysts reference an equation referred to as the multiplier equation when estimating the impact of the reserve requirement on the economy as a whole. The equation provides an estimate for the amount of money created with the fractional reserve system. The estimate is calculated by multiplying the initial deposit by one divided by the reserve requirement. So, using the example, the calculation is $500 million multiplied by one divided by 10%, or $5 billion. It should be noted that this is not how money is actually created. It is only a way to represent the possible impact of the fractional reserve system on the money supply. As such, while is useful for economics teachers, it is generally regarded as an oversimplification by policymakers.” Investopedia
Fractional reserve banking basically means that more debt can be created, based upon the assumption that on a minority of people will ever withdraw their savings as the same time. The amount of new debt created is constantly being compounded because the new money lent out, is deposited back into banks which can then be lent out again. Each time created more debt in the form of interest on top.
How long can the system be sustained?
Fractional reserve banking has been essential for the growth of the global economy. Without it we wouldn’t have much of the technology, infrastructure and general good standard of living as we do today. It’s a well oiled machine at the moment and has been running without many hiccups for the past century. However many speculate that the system cannot be sustained forever.
The amount of debt in the world is only expected to continue climbing, and at an even faster pace. How long can it be sustained? Let us know your thoughts in the comment section at the bottom of the page!