The numbers don't lie: in 2000, global debt stood at a $62 trillion, while global GDP was a $33.5 trillion. But today, the debt figure has recently ballooned to over $300 trillion, while GDP has only grown to $101 trillion. These figures suggest that the world is becoming increasingly indebted, with potentially dire consequences for economic stability and future growth.
High interest rates in the current context is not only putting the financial institutions at risk, it is a death sentence to the entire debt-fueled economy. If we were to treat the global economy as a business, which bank would lend us the money to generate a measly $1 for every $3.6 we borrow? This simple question exposes the unsustainability of using debt to fuel economic growth, rather than generating real goods and services. Until when can debt keep growing much faster than the economy?
The current model relies on borrowing to finance public spending and price inflation to reduce the real value of debt over time. While inflation can help reduce the value of debt, it can also lead to rising prices and reduced purchasing power for consumers. As growth is only artificially fueled by ever-increasing debt we may be trapped in a hamster wheel to sustain economic growth while trying to keep up with inflation. The future needs to keep paying the past for the system to keep working.
This economic model could be essentially compared to a Ponzi scheme that relies on a constant influx of new money to keep the cycle going. But just like any Ponzi scheme, this will be ultimately unsustainable, and the consequences are already being felt in the form of recurring financial crises, bubbles, and "Minsky moments."
The comparison to a Ponzi scheme is more than just a rhetorical flourish. Both systems rely on a constant stream of new investment to keep the house of cards from tumbling down, and both are ultimately doomed to fail, underscoring the need for a new economic model that focuses on generating real economic value and sustainability, rather than relying on ever-increasing debt.
One of the biggest challenges to change this long standing problem is short-term thinking. In the democratic world, governments are focused on their 4-year mandates, which leads to a tendency to kick the can down the road when faced with systemic collapse. The immediate relief usually lies upon printing more money and central banks end up becoming the lender of last resort to bail out the market and avoid short-term agony. But this mentality only exacerbates the problem.
The fact that the entire global economy is now at the mercy of central banks' monetary policies raises serious concerns about labelling the current model as free-market capitalism. Free-market capitalism is based on the principle of supply and demand, where prices are set by the forces of the market rather than by intervention. However, in the current context, the central banks decisions are increasingly dictating the fate of industries across the globe.
Is sustainable to have an economy that effectively depends on the decisions of central banks? Additionally, the increasing levels of debt are creating an environment in which the central banks must maintain low-interest rates and easy money policies to avoid a catastrophic collapse. This means that the central banks and the whole economy are effectively trapped in an unsustainable a cycle of debt and low-interest rates.
The exponential growth of global debt compared to the slower growth of global GDP raises serious concerns about the viability of the current economic model. As the world continues to grapple with the challenges of growing debt and economic uncertainty, policymakers and industry leaders must find ways to change the paradigm to achieve financial stability and real economic growth based on the production of actual goods and services.
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