What’s Behind the World’s Debt Crisis?

AMA4-24-15On one spring day in late April 2014, the world’s debt clock checked in at a staggering $60, 656, 668, 640,014. That number changes by the minute, as do the totals for interest accrued – over $1,000 every minute.

The world is deep in debt – and becoming more indebted every minute, with no end in sight. Many countries carry so much debt that it can never be paid off. But debt itself is a stock in trade in the world’s money markets, which creates winners and losers in the global debt game.

How did the world wind up in so much debt? And what are the implications of massive international indebtedness for the future of both the US and world economies? Economist John Rubino spoke with Jason Hartman about those things on a recent episode of the American Monetary Association podcast.

As Rubino points out, the world now runs on debt – a situation that’s been accelerating over the past forty years r so, since the end of the Gold Standard. And that creates some unprecedented situations, such as negative interest lending and investors paying for the privilege of stashing money in safe havens.

The gold standard, or lack thereof, plays a key role in today’s world debt situation. From the first days of using gold for currency back in 643 BC, this precious metal, along with its less distinguished cousin silver, has created the standard of wealth that defined the status of countries like Spain, Portugal and France throughout their history.

By the mid 1800s, the rise of printed paper money and ever expanding global trade initiatives led major world powers to adopt the Gold Standard – a system that tied the value of a country’s curr4ency to its store of gold. In other words, a given amount of paper money could be redeemed by its movement for the same value in gold.

That worked relatively well for a while. But as the price and availability of gold began to fluctuate, so did the currencies tied to it. IN 1933, the US created the Federal Reserve to oversee and regulate gold and currency issues. But when World War I began in 1914, several European countries suspended the Gold Standard in order to print up more money to subsidize their part in the military effort.

That created runaway inflation, so after the war, most countries returned to the Gold Standard – or a modified version of it. But when the Great Depression hit in 1929 many countries had to abandon the Gold Standard again. People were hoarding gold out of a deep mistrust of banks, and President Franklin Delano Roosevelt froze gold dealings completely. No one could export it, hoard it or sell it.

That made the US the largest holder of gold in the world. But as the economy became more robust after the two World Wars, more trade was conducted in dollars – now widely seen as a stable currency. And so in 1971, President Richard M. Nixon signed an act doing away with the Gold Standard for good.

That, say some economists, paved the way or the current debt crisis. With printed money no longer tied to a tangible commodity, countries were free to print as much money as they needed to cover commerce and loans outstanding to other countries.

The value of money became essentially whatever the issuing government claimed it to be. And without tangible assets to back it up, debt became largely am exercise on paper, with many countries falling so deeply in debt they may never escape it.

The looming specter of all that debt has investors and everyday citizens worried that a house of paper cards could collapse and take their assets with it. Thus the rise of tax havens, secure places in various parts of the world where investors could keep assets safe from financial uncertain ad devaluation at home.

But that too is changing. Even as “good borrowers” are being rewarded for their debt management by increasingly good rates that push interest rates into negative numbers, traditional safe havens like Switzerland are encouraging people to use their safe banking resources to protect assets.

Those days of safe tax havens may be ending, though. Recent legislation in the US and a globally focused counterpart in Europe threaten to end the privacy and relative safety of offshore tax havens by requiring host countries to report accountholders’ assets to their home country – effectively ending the financial privacy that attracted users in the first place.

All these factors contribute to making the word’s debt less manageable, not more. And as debt, inflation and financial mismanagement plunge some countries into financial crisis; so market watchers worry that there may be serious crisis ahead.

Is there? Rubino notes that there are really only two options: a collapse of the entire system, or a round of inflation not just for the US but the world as a whole. And with the world’s hopes for financial stability resting on the paper tiger of printed money, tangible assets such as property remains as good as gold. (Top image: Flickr/elibrown)

Read more from The American Monetary Association:

The Wizard of Oz: An Economic Fairy Tale?

Do Currency Wars Drive World Economies?

The American Monetary Association Team


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