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Global debt: who owns the world?

Global debt is now three times the global economic output, which is much higher than it was before the economic crisis. An extremely disturbing picture - or not?


The ECB is flooding the markets with fresh money. Unfortunately, the money does not end up in consumption or in investments. It flows past the real economy and ends up in the stock markets, in real estate and in government bonds.

Across the globe, companies, states and households have accumulated debts that they will never be able to repay. The global debt levels of states and companies are thus significantly higher today (compared to gross domestic product GDP twice as high) as they were before the economic crisis in 2008. The consequential costs in the form of falling tax revenue, economic stimulus programs and bank rescue packages are clearly noticeable. It is mainly the richest countries that have accumulated the highest mountains of debt. The International Monetary Fund IMF according to the US, China and Japan are among the most indebted countries and alone account for more than half of the global debt. But the emerging countries have also discovered life on pump.

Global debt by sector in trillions of dollars in 2003-2018
Global debt by sector in trillions of dollars in 2003-2018

Isn't that extremely worrying?

Professor Dorothea Schäfer, Research Director of the Financial Markets Department at German Institute for Economic Research (DIW) in Berlin is more relaxed about the situation. According to her, public debt alone is not a cause for concern, but something "completely natural" in an economic system. For Schäfer, the accumulated debt is primarily the result of the global economic crisis and a sign that central banks have flooded the markets with money. According to her, the situation only becomes dangerous when, for example, a real estate crisis meets high unemployment.
Richard Grieveson, economist at Vienna Institute for International Economic Comparisons (wiiw), thinks that people - especially in German-speaking countries - worry far too much about debt levels. "Whether debt becomes a problem depends on many other factors, such as nominal economic growth, the effective interest rate, demographic trends or the average maturity of debt instruments," said Grieveson.

Global Debt - No Reason To Save?

In fact, there seems to have been some rethinking among economists over the past decade regarding sustainable debt. While there was once a certainty that excessive government debt would damage the growth of economies, today austerity policies are demonized as a brake on investment and growth. Olivier Blanchard, former President of the American Economic AssociationWhen he said at the beginning of the year in his farewell speech: “As long as the real interest rate on loans is lower than the growth rate, there is no fiscal reason to save. Because the debt level also melts like a snowball at light plus temperatures ”.

The International Monetary Fund also stated in its latest stability report that the global financial system has undoubtedly become safer since the economic and financial crisis. He points out that banks worldwide have been forced by law to increase their equity ratios and liquidity reserves, improve their risk management and are subject to new regulations, regulators and stress tests.
The fact that states lose their fiscal policy and central banks through their attempts to resuscitate the economy due to the high level of indebtedness does not seem to play a significant role.

Global Debt - Who exactly owns the States?

Who owns the EU government bonds?
Who owns the EU government bonds? Long-term debt securities, 3Q 2018, in billion euros

The good news is that behind every liability there is also a fortune, and ideally also consumption or investment. But it is not so easy to determine who will enjoy it. On the one hand, there is no shareholder directory for government bonds, and on the other hand, states often take out a "loan" from many thousands of investors at the same time with a bond, who then continue to trade with it. For the Eurozone, however, collects European Central Bank (ECB) diligently data to gain at least an insight into the shareholder structure of the 19 euro countries.
This makes it easy to see who the euro countries 'belong' to: two fifths to banks and almost one fifth to foreign countries and insurance companies. Incidentally, two-thirds of the Austrian state 'belongs' to foreign countries and one-fourth to the banks.
Professor Schäfer sees this financing structure as relatively solid, because banks and insurance companies are a reliable group of investors for the states. Banks in turn need stable investment opportunities with fixed interest rates. "What worries us economists much more is the fact that banks are increasingly investing in bonds from their own countries," said Schäfer.
Indeed, government bonds have enjoyed great popularity since the global and European follow-up crises. This is not only because they are a safe haven for investors, but above all because the banks do not have to set aside equity for this.
They are particularly popular with the European Central Bank, which has been buying up bonds from euro zone countries on a large scale since 2015. The volumes varied between 15 and 60 billion euros - monthly, mind you. “The ECB has been trying to boost consumption and inflation in recent years, but it has not really succeeded. However, what she has managed to do is ensure stability, ”says Richard Grieveson.

Where's the fresh money?

In combination with its zero interest rate policy, the ECB is flooding the markets with fresh money. But where's that money? The working and non-wealthy part of the population sees very little of it. On the contrary: A considerable proportion of EU citizens are at risk of poverty and suffer from housing shortages (17 percent). Well-educated people and families also have difficulty finding affordable housing. In addition, increasing nationalism, hostility to people and the EU give an insight into the general mood and confidence of the European population.
Unfortunately, the money does not end up in consumption or in investments. It flows past the real economy and ends up in the stock markets, real estate and government bonds instead. Even though this system may work economically, it still produces horrendous inequality, with all of its social and political consequences.

Global debt: real vs. Financial capitalism

Stefan Schulmeister is one of the few economists who deal with this question: How can money be diverted from the financial markets to the real economy? He makes a fundamental distinction between two game arrangements in our economic system: real capitalism, which directs capital into productive, value-creating activities and thereby creates jobs and prosperity on a broad basis, and financial capitalism, which only assets through valuation differences in interest rates, exchange rates, commodity and Real estate prices are generated and multiplied by the "usage fees for existing assets". The latter dominates the global economy today, dampening production and creating unemployment, public debt and inequality.
According to Schulmeister, the main reason is that the returns on the financial markets are higher than those that can be expected from traditional entrepreneurship. In other words, the wealthy get richer much faster through financial speculation than through classic entrepreneurship.

A key instrument to counteract this development would be the introduction of a financial transaction tax, which directs the pursuit of profit from short-term financial transactions to long-term activities in the goods markets. Schulmeister also recommends the establishment of a European Monetary Fund to finance countries. His bonds should not be tradable and would give financial alchemists the opportunity to speculate on changes in interest rate differentials between currencies or the bankruptcy of individual countries. For his colleagues, the recommendation is a reorientation from a neoliberal 'market religiosity' back to education and participation in the real material conditions of the people.

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Photo / Video: Shutterstock, Option.

Written by Veronika Janyrova

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