Bill Gates recently tweeted a chart (see below) that showed the percentage of the world population living in extreme poverty since 1820. Thankfully, there has been a tremendous improvement in the past two centuries – 94.4% of humans lived in extreme poverty in 1820 versus only 9.6% in 2015. Of course, this chart started a lively debate about the reasons for this improvement, whether the definition of extreme poverty is correct, and so on.
The point I want to add to this debate is that there is a very real risk that soaring global debt will cause another severe economic crisis (likely a full-blown depression), which will reverse a portion of the gains made in poverty reduction, cause geopolitical instability, unrest, wars, and other unpleasant side-effects. Global debt has surged by nearly $150 trillion since 2003 and $70 trillion since 2008. As bad as the 2008 global financial crisis was, the next crisis will hit the global economy even harder simply due to the fact that an additional $70+ trillion in debt has been added. That means that governments and central banks have far less firepower with which to stabilize their economies in the next crisis.
In most major economies, debt has been growing at a faster rate than the underlying GDP:
The debt binge of the past several decades caused global debt as a percentage of GDP to reach an all-time high of 225% in recent years (see black line):
Unfortunately, the global economy is heading toward a point of total debt saturation, which is the inevitable result of debt growing faster than the underlying economy. Growing debt burdens will stifle economic growth, which will make it even harder to grow out from under the debt. Eventually, global debt saturation will lead to a downward spiral situation in which nearly all central banks will be forced to debase (or “print”) their fiat/paper currencies at an extremely high rate in order to pay the interest on debt and to keep their economies afloat for a little while longer. Humanity is going to pay the price for borrowing to create economic growth. (Note: this is not the fault or endgame of capitalism, but of fiat currency – learn more).
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