The big problem with debt is that it is addictive. Once a person starts down this ramp, it is hard to stop before insolvency. Addictions give way to irrational action. Sometimes the only way to stop is to crash into something hard.
The debt problem is compounded exponentially when the addict is not an individual but a government. It is so much easier to spend someone else’s money and borrow more when it runs out.
Governments trying to be all things to all people soon find themselves funding expensive projects that never seem to die or end. As governments barrel down the irrational road of debt, they must also crash into something, although in a much more spectacular way.
No one likes to talk about the eventuality of these crashes. Instead, the addicted debtor is always obsessed with postponing the day of reckoning. The higher the debt, the more desperate become the measures to kick the can down the road.
Thus, America faces a debt crisis that is running out of options. The facts are evident. It is not a complicated scenario. There is no need to be a conspiracy theorist or alarmist to point out the signs. The crisis consists of massive debt and irrational official policies coming together to increase the speed and likelihood of a crash.
Destroying the Modern Economy
It is not easy to destroy a modern economy because it is a complex, interconnected system with many safeguards to deal with crises. A robust economy can deal with some debt crises involving large amounts of money. Indeed, this has been the case in America for decades. Financial wizards work their magic to mitigate the absurdity of living beyond one’s means. America is aided by the fact that the rest of the world always wanted to buy its debt (seeing it as more creditworthy), allowing the nation to live with a false sense of security.
Thus, the global financial system can absorb the normal headwinds that disrupt the world economy. However, solutions increasingly patched up crises with ever more debt.
Turkish-born Iranian-American economist Nouriel Roubini, professor emeritus of New York University’s Stern School of Business, believes that the world economy is heading toward a perfect storm of economic, financial and debt crises threatening the whole system. The cause is an orgy of deficits, borrowing, and leveraging that puts even the most resistant systems to the test. Outside factors like war and the pandemic add more stress to already overloaded structures.
Roubini does not give dates or present doomsday forecasts. His assessment is a calm statement of facts that indicate where the economy went wrong.
Mountains of Debt
Key components of his assessment are the two main categories of debt exploding in America and the world.
The first is private debt based on individual addiction to debt mechanisms now considered normal. A $16.51 trillion mountain of American household debt, for example, includes mortgages, credit card debt, auto loans, student loans, and personal loans. Personal debt everywhere is approaching pre-COVID levels.
Another category of private debt is that of the corporate world. Due to the chaotic COVID climate, much of the business world is weighed down by bank loans, bond debt, and other investment instruments. The American portion of the $87.52 trillion global non-financial debt is $23.7 trillion. The American financial sector also carries significant liabilities of bank and non-bank institutions ($18.9 trillion).
All this global private debt alone should be a matter of concern. However, there is more.
Massive Public Debt and Liabilities
The frenetic intemperance of governments has dramatically increased the amount of debt via a massive array of public debt instruments. These include the national U.S. debt of $31.3 trillion (and growing). State and local bonds and other formal liabilities are also at high levels. There are also the implicit unfunded liabilities found in pension and healthcare schemes that grow as people age and the payoffs come due.
American private debt addiction is mirrored in other advanced and developed countries worldwide.
