Rob’s comments below are in italics.Derek’s comments below are in normal font.
We're discussing big numbers today, a topic we've explored before in how billions and trillions are used in public discourse. We're going to talk about that today in the context of US debt. So what do people need to know about this?
Right, so I'll just give a bit of a recap. When we talked about an idea of how to get a handle on millions and billions in the past, I said that there are various ways we can envisage these things, but a very useful one is to say that if you take somebody who's earning £25,000 a year, pounds or dollars or euros or whatever it might be. They've got a working life of 40 years. Their total income over that lifetime is a million.
We could say, as a rule of thumb, that a million pounds or a million dollars is the lifetime earnings of a typical individual. You might want to play around with that if you reckon the earnings rate is a bit lower, a bit higher or the lifetime. But that's a good order of magnitude.
It seems to be in line with the stated averages for what people typically earn…
Yeah, anyway, so then if you move up to a billion, then obviously this is the lifetime earnings of a thousand people. It would be, let's say, the entire population of a fairly large village, a thousand people. A billion pounds or a billion dollars would be the equivalent of what that whole population earned.
Given that trillions have been cropping up lately, extending this to a trillion would represent the lifetime earnings of a million people. In other words, in a substantial city, the entire earnings of that city for a lifetime adds up to a trillion.
So in light of that, let's look at the various debts that are running about in the United States. The US federal debt outstanding is just under $37 trillion. The way things are going it won't take long to get it past that number. Then on top of that, you've got the total municipal debt. That's bonds issued by cities and urban and rural authorities across the country. So that's another four trillion.
Then you've got debt bonds issued by individual states. California alone is 1.6 trillion. That's significantly larger than the next largest single state, which is Illinois. But two trillion for the total of all of the 52 states would be a very conservative estimate. So I put that in at 2 trillion.
Then you've got US corporate bonds, debt issued by large corporations like General Motors and IBM and so forth, whereby they borrow money for a fixed period of time from investors. They agree to pay a rate of interest that is higher than the government rate. Some people might opt for this to earn a larger income, but they should be aware that, as a private financial organisation, it may not be as reliable as the government. Although the government is probably not very reliable at the moment!
Anyway, the total of the US corporate bond issues is 10.5 trillion. Then on top of that, you've got the US household debt, debt owned by the general population, credit cards, bank overdrafts, car loans, and mortgages. That's another 18.2 trillion.
So when you add that all up, it comes to 72 trillion. So if you then compare that with the US population of 340 million, what this amounts to is that the total outstanding debt in the United States is approximately 20% of the entire lifetime earnings of the entire population.
Looked at in those terms, it clearly is beyond the bounds of possibility that that is something which is ever going to be repaid in the normal sense. You know, if I borrowed a hundred pounds off you because I was a bit short one month and said I'd pay you back the next month, that would be the normal way we think about debt. But when you've got debt which is completely out of proportion to any chance of repayment, such as that across the whole of the United States. It's just not going to happen.
No, I think that was never the intention.
Well, of course, that's another whole point. I'll do a similar exercise next week for Britain. Of course, Britain had a substantial amount of debt on undated bonds, issued in the 19th or early 20th century, when British government obligations were considered as good as gold.
They could have kept that rolling, but some financial genius in the treasury decided to redeem them at a time when two and a half per cent seemed an excessive rate of interest because temporarily it was below that. Not included in those figures are social security obligations, Medicaid, Medicare, and state and federal pension obligations, none of which are included in that figure. That is a form of debt which is not even included in that figure.
So there's either going to be a default at some stage or there is going to be inflation on a much more massive scale than the inflation that we've seen over the last few decades, which will in the end bring the obligations down to nothing.
Of course, a lot of this debt is held by Americans themselves, but a lot of it has been held by other trading parties around the world, in particular the oil producing states and in particular China, because for the last 30 years that China's been accelerating its economic and industrial expansion and selling goods to United States and other parts of the world. If I want to buy anything from China, I have to pay in United States dollars. So I've got to change my pounds to dollars and then send the dollars to China.
They have been, of course, recycling these by, for the most part, buying United States Treasury bonds. So they've been lending that money back to the United States government, or they've been buying significant but minority shares in US industries. Of course, this presented them with something of a dilemma when, over the last few years, they decided this is possibly no longer looking like a sound investment.
Had they dumped their treasury bonds it would have crashed the prices of the securities. So they didn't do that. But of course, all of these treasury bonds have an expiry date when they have to be repaid. The US Treasury has been rolling over its debt by issuing new bond issues, hoping that the people who sell the expired bonds will buy the new ones. This approach has generally held up over the past couple of decades.
Of course, the unfortunate thing is that over the last year or so, the interest rates have risen. So although they might be able to issue an amount of debt, they're having to issue it at a higher rate of interest. So, this is draining the US federal economy at an increasingly rapid rate. However, overseas bondholders, particularly China, have been cashing in their expiring bonds and saying, “thank you very much, but we’re not buying the new issues.”
The brokers responsible for selling these bonds are increasingly struggling to find buyers. What the Chinese have been doing instead is they've been investing internally. They've been investing in numerous countries around the world.
This, I would say, is genuine investment. It's building roads, railways, viaducts, oil refineries, and water purification plants across large areas of the underdeveloped world. Of course, this has also rattled the United States Washington establishment because they are jumping up and down complaining about the fact that China and Russia are exerting undue influence in Africa, for example. Many African countries are beginning to realise which side their bread's buttered on.
That was pretty much what I wanted to say today for my summary of where we're at. Any thoughts?
Yeah, it ties quite closely to last week's discussion about the BRICS nations. But the clear emergence of a multipolar world and people coming to separate arrangements outside of the US dollar. So we are seeing a continuation of that.
What do you make of the assertion that if all of this debt were just wiped off, that essentially all money would disappear? In other words, why can't we just wipe off the debts? That's happened in the past in the form of debt jubilees.
Deby jubilees were pursued as a deliberate social stabilisation in the ancient world. That was part of certainly the Judaic code that there would be a Jubilee every 50 years or every seven times seven years, which was 49 years when debts would be written off and slaves would be freed because there was a recognition that as a matter of practicality having the majority of the population in hock to a small minority was socially destabilising.
Whereas our current rulers do not care about such trivialities!
Exactly. But sooner or later, equilibrium will be restored one way or another.
How much of what's going on, for instance inflation, do you think is being put in place deliberately? Or is it more like a runaway train that can't be stopped?
I think it's a runaway train that can't be stopped.
Anybody who thinks deeply about this knows that it's not a sustainable situation. At the same time, everybody concerned hopes that it will be somebody else's problem later rather than theirs in some impending present moment. Does that make sense?
I guess to take away from this episode, when millions, billions and trillions get thrown about, you make this mental heuristic that a trillion is a few billion, but it's not. It's many, many, many times more. A thousand times more. So having that mental visualisation of the village versus the city is essentially quite helpful.
Yeah it's a thousand billion.
Good, OK, well, we'll hopefully be back next week with some more comments on the more insane goings on.
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