The world is already drowning in debt and governments are now borrowing and spending as if there is no tomorrow. The amount of money being spent is eye-watering. Where is it coming from and how are we (or more likely future generations) going to repay it?
The Institute of International Finance calculate that global debt at the end of 2019 was US$255 trillion (that’s 12 zeros). Global debt increased by US$3.3 trillion in 2018 and by US$10.8 trillion in 2019. 2020 will dwarf these figures. Global debt is now US$87 trillion higher than it was before the 2008 financial crisis. The world has simply been flooded with cheap money and this, in part, is the reason for stock markets climbing to record highs.
Household debt has been no exception, it has grown from US$35 trillion in 2007 to US$48 trillion at the end of 2019. Most of this has been in the developed world where households have used cheap money to fund extravagant lifestyles. Household debt – mortgages, auto loans, credit card and student debt – in the USA stood at US$14.15 trillion at the end of 2019. Switzerland has the world’s largest household debt to GDP (basically everything the country produces in a year), with Australia a close second. Australian household debt is now 120% of GDP.
“How did you go bankrupt?” Bill asked. “Two ways,” Mike said. “Gradually and then suddenly.” The dialogue is from Ernest Hemingway’s 1926 novel, The Sun Also Rises. I fear there are many around the world who are just about to enter the ‘suddenly’ phase of going bankrupt. At some point the piper has to be paid.
As the Covid-19 crisis has unfolded, governments have tried to solve the resulting financial crisis by throwing huge amounts of money at the problem. In March and April the USA spent US$2.8 trillion on numerous stimulus packages and there is already talk of another. The US Treasury Department said it would borrow US$2.99 trillion (from who?) between April and June to deal with the fallout from Covid-19. This is more than it would normally borrow in a year. Government debt for the USA is nearly US$25 trillion.
The IMF has stated that it “stands ready to mobilize its US$1 trillion lending capacity to help [its] membership.” Most governments have introduced similar measures. Some countries will be better placed than others but it is safe to assume that no-one had billions of dollars tucked away for such an emergency – unless of course those countries that have healthy Sovereign Wealth Funds decide to raid them.
In addition to governments borrowing and spending (or simply printing new money), their incomes have been decimated. Consumption is down and with it VAT revenues, jobs have been lost at an alarming rate affecting payroll taxes and company profits have been hard hit with the resultant loss in tax payable. A major source of income – tax on fuel – has also been badly affected. The full effect of the loss of income to governments will only be known in the months to come. Those countries that rely heavily on oil for their revenues will be severely affected. As the world placed itself in a coma so the demand for oil dried up. Those countries that rely heavily on tourism and immigration (like Australia and New Zealand) will also be severely affected.
The reasons for governments doing what they have done have been debated and discussed at length. It has been about saving lives. But at what cost?
I recently came across an open letter from the CEO of PSG Group, Piet Mouton, to President Cyril Ramaphosa in South Africa titled ‘Silence is no longer an option’. He makes some very valid points that apply not only to South Africa, but the world in general.
To put PSG Group into perspective, their 2019 Annual Report notes, “Our market capitalisation (net of treasury shares) is approximately [ZAR] R57bn, [US$3bn] while we have strategic influence over companies with a combined market capitalisation of approximately [ZAR] R212bn. [US$11.2bn]” I have over the years interviewed many of the senior staff of the Group and have the highest respect for them as a company.
Mouton states that South Africa does not have ‘the luxury’ or remaining in lockdown and that the only viable alternative is “…a continued lockdown of the elderly and frail until the virus is contained or a vaccine becomes available, while the economy operates as close to normal as possible.”
He makes the point that he is “… NOT arguing economy over lives. BUT the truth is that lives are inextricably linked to the economy. Our survival and wellbeing depend on whether and how quickly our economy recovers.”
President Donald Trump (of whom I am not a fan) made the point, “We can’t have the cure be worse than the problem,” He later tweeted, “We have to open our country because that causes problems that, in my opinion, could be far bigger problems.” He was no doubt referring to the economy and the possibility of a depression – I think everyone agrees that a worldwide recession is a foregone conclusion.
It is a very difficult situation. On the one hand we have hundreds of thousands of people dying but on the other hand we have tens of millions of people who have lost their jobs (and their ability to look after their families); many millions in poorer third world countries will starve; millions will go bankrupt and future generations will take decades to pay off the debt we are now incurring. We cannot keep the world locked up for much longer without a real risk the whole system will collapse.
There is a clear link between unemployment and suicide. In February 2015 the World Economic Forum dealt with this in an article titled ‘The link between unemployment and suicide’. The article dealt with a study carried out by Carlos Nordt and colleagues from the University of Zurich which explored the link between increases in rates of unemployment and suicide.
The study “attribute[s] 45,000 – or one in five – suicides a year worldwide to unemployment, with a further 5,000 deaths caused by the economic crisis.” They noted “There were an estimated 233,000 suicides a year between 2000-11, of which around 45,000 could be attributed to unemployment. In 2007, the year before the crash, there were 41,148 identified cases of suicide. In 2009, this number had risen to 46,131 – an increase of 4,983 or 12%”
On 19 March 2020 the International Labour Organization (www.ilo.org) noted, “Initial ILO estimates point to a significant rise in unemployment and underemployment in the wake of the virus. Based on different scenarios for the impact of COVID-19 on global GDP growth, preliminary ILO estimates indicate a rise in global unemployment of between 5.3 million (“low” scenario) and 24.7 million (“high” scenario) from a base level of 188 million in 2019. The “mid” scenario suggests an increase of 13 million (7.4 million in high-income countries).” I think it is clear they vastly under-estimated the extent of the problem.
CNBC (www.cnbc.com) on 30 March 2020 noted “The coronavirus economic freeze could cost 47 million [American] jobs and send the unemployment rate past 32%, according to St. Louis Fed projections.” and, “There are nearly 67 million Americans working in jobs that are at a high risk of layoffs, according to the analysis.”
By 23 April 2020, 26.5 million Americans had registered for unemployment benefits. For the week ending 23 April 2020, 4.4 million Americans registered for unemployment benefits – the weekly average prior to the Covid-19 crisis was 210 000. It is no different elsewhere in the world.
Many developed country governments are now paying companies to keep their employees on their payrolls. They cannot do so for an extended period.
A continued lockdown of the world will result in a significant increase in suicides over the next few years in addition to all the other issues.
Mouton’s comment that South Africa does not have ‘the luxury’ of remaining in lockdown applies to the world. He is, in my opinion, absolutely right when he says that the only viable alternative is “…a continued lockdown of the elderly and frail until the virus is contained or a vaccine becomes available, while the economy operates as close to normal as possible.” We have to find some way to protect the elderly and the vulnerable but also allow businesses to open and the economy to return to some measure of normality.
Right now we need bold leaders who can come up with creative solutions. Simply trying to go back to a pre-Covid-19 world is not an option. As to who is going to pay for all this debt that we are creating, I hope that future generations will not judge us too harshly.