June 2024

Debt bomb, debt bomb, beware the debt bomb!

It’s known as Herbert Stein’s Law, “If something cannot go on forever, it will stop”.

So, let’s look at something that cannot go on forever – Government borrowing.

Here’s a outline map of Europe:

map debt to gdp

The countries coloured in purple are bankrupt. They can never repay the debts they have, but still they keep on borrowing more. Big financial institutions keep lending money to these countries because they believe that, when the proverbial hits the fan, these countries will be bailed out by confiscating citizens’ savings as was done in Cyprus.

The countries coloured red (Spain, France, UK) are moving ever closer to bankruptcy. (I don’t know why Germany is coloured red).

Now, here are some figures:

government debt per person

(I apologise that the chart isn’t clear but you can see the original at….0…1ac.1.64.img..1.14.551.Qz335mB-N7U#imgrc=8eNVaRvO26ll7M%3A  )

The left-hand column shows Government debt per person in 2014 and the right-hand column Government debt as a percentage of GDP. The right-hand column is probably the most important and on it Japan is number one followed by Greece, Portugal, Italy, UK, Ireland and Belgium.

If something cannot go on forever, it will stop. If governments cannot go on borrowing forever, they will have to stop.

When governments can no longer borrow and are still overspending, there are only four ways out:

  1. Massively cut spending leading to widespread misery, social breakdown and chaos – Venezuela?
  2. Default on the debt causing a financial crisis that will make 2008 look like a picnic
  3. Inflate away the debt by encouraging inflation and the destruction of people’s savings (Britain in the 1970s)
  4. Confiscate ordinary people’s savings to rescue the banks that have loaned money to countries that would never be able to repay the loans

It’s easy to make hyperbolic predictions about the future and most scares actually never happen in reality. But a world where the most indebted countries are stagnating economically while increasing their debt levels isn’t anyone’s idea of a bright future.

What will happen? I haven’t a clue, but it won’t be pretty. And if I was Spanish, Italian, Greek or Portuguese, I would have moved my savings to a bank in Germany or the Netherlands (or perhaps even to Australia, Canada or New Zealand) because you’re a sitting duck for financial expropriation when your government can no longer borrow and decides to ‘do a Cyprus’.

And here, for those who haven’t seen it, here is the excellent Dominic Frisby singing “Debt bomb”. Enjoy!

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