Well I haven't read through all the posts, so forgive me if this has already been posted. Have a look here;

https://www.cia.gov/library/publications/the-world-factbook/rankorder/2079rank.html


The whole world is 44 trillion dollars in debt, for the sceptics just ask yourself who does the world owe 44 trillion dollars to ? However you may try to shroud things in technical jargon the simple fact is that for every dollar of debt there has to be a dollar of credit. The only possible explanation is that this debt has accrued due to the fractional reserve system. In effect the holders of this debt own the entire world, since there is only the equivelant of 4 trillion dollars in circulation. I think that is the point that the original poster was trying to make, debt increases exponentially and at some point in time the interest payments will exceed the GDP of the whole world, of course sometime before then the system will crash completely.

Some comments on the two posts from Jon_2 and Asteve:

Asteve, I understand when you say that the $44T is owed to the future economy, but the future economy will never see the money returned. Our descendants will still owe the $44T, plus further interest of course. Unless we invest the borrowed money to create real and lasting wealth, we are more accurately plundering the future. I would say that this is the case in the US and the UK at present.

GDP, debt and interest figures are all snapshots of continuously varying real world quantities. I see no discrepancy between you both there.

Management of credit risk is largely at the discretion of the banking system. Banks can mostly chose to whom they will lend, and how much.  Private, profit making banks will act rationally to maximise their perceived profit/risk ratios. What loans and levels of risk are in their interest?

Large, low risk loans are good business. Think national debt, lent to governments with powers of taxation. Think mortgages with real estate as collateral.

High risk loans, soon sold on, are also surprisingly good business. Think sub-prime mortgages and CDOs. Default risk is high, but this risk is offloaded asap by the initial lending bank.

Without external regulation, debt will be kept in check only in so far as it suits the banks. Debt is their business and, up to their acceptable levels of risk, they will maximise it. The theoretical attractor of global unserviceable debt will be approached asymptotically, sometimes more quickly, sometimes more slowly, and with some reversals along the way as some loans default. Average overall default risk will increase and at some point along this approach trajectory the financial system will fail.

Inasmuch as the banking system, the money power, has influence over government, and therefore over banking law, society is in serious trouble. Those who control the banking system would then effectively control far too much. They would have power way beyond any accountability.

I don’t know how influential the money power really is. But if it is as pervasive and strong as some maintain, then watch out. There could be a storm coming.

“Give me control of a nation's money and I care not who makes her laws”.

-         Mayer Amschel Rothschild

“Power tends to corrupt and absolute power corrupts absolutely”.

     -    Lord Acton

Response to Asteve, his post in italics:

A-ha, I wasn't very clear - on GDP and total debt,I'll try again.

GDP is an annual rate - the first derivative of an economic model of production with respect to time... (C.F. speed.)

Absolute level of debt at a given moment in time is a measure of value rather than a rate. (C.F. distance.)

So, I'd argue that it is not necessarily significant that debt exceeds GDP. It becomes a rather more significant problem if interest on debt approaches GDP - as, then, debt reduction becomes impossible.

On my reading of Jon_2’s post he is also comparing interest with GDP. We are all in agreement here I think.

With respect to risk, I agree that government backed bonds are usually considered 'safe' - but even these are no panacea - as the Russian default in 1998 shows. I utterly disagree that mortgage debt is safe... (I can't imagine the 350,000 flooded houses this weekend will retain their value, for example) though I accept that, in principle, such risk could be insured. Given that I consider all mortgage risk to be significant (though, obviously, risk is highest where loan to value is highest) I would _really_ like to establish statistics showing how mortgage lenders manage their risk. I think that MBS/CDO/CDS trading is key to understanding the mortgage market. I'd even think it credible that banks could benefit financially from large-scale mortgage defaults... if they maintain suitable positions on debt default in the (unregulated) credit derivatives market.

I didn’t say that mortgages were “safe”, I just categorized them in general as comparatively “low risk”. Similarly the national debt.

We agree that CDOs etc. have given banks a way to make even high risk loans profitable, and they have done so in spades. And yes, maybe the banks are now effectively going short on loan repayments through credit derivatives. There’s no stopping them!

With respect to the idea that the entire financial system will fail - I don't agree that there is evidence to support that conclusion. Inflation is the mechanism by which the financial system can recover... and assets will survive, full worth intact. Inflation would effectively cancel debts - but, unless interest rates were similarly high, and transactions quick, the economy could easily suffer a major setback as currency risk would make a large extent of trade impossible.

Inflation is caused primarily by increasing the money supply, this usually by lowering interest rates to encourage borrowing.  Necessarily, debt increases with the money supply. So, there is a two-way pull on total interest payments, more debt but lower interest rates. Temporary reprieve is possible, perhaps for a considerable time, but the basic dynamic of debt growing faster than money supply ticks away. Sooner or later the interest due on the total debt grows to a size comparable to GDP. Inflation is not a sustainable way of avoiding breakdown.

If, as you suggest, interest rates are kept high, then borrowing is discouraged and the money supply shrinks (or maybe just grows very slowly). This is not compatible with inflation. Deflation and depression are likely.

Asteve, thank you for your post.

Could you please do the GDP/interest comparison restricted to the US dollar? That is where I think that big trouble will first occur, most likely as hyperinflation. As a very rough guess I would say that when interest grows to be of a similar order of magnitude as GDP (i.e. well over 10% of it) then we are in endgame territory. Let me emphasize that my focus here is primarily on the breakdown of currencies, though obviously the corresponding sovereign nation and its whole economy will then suffer.

Particular markets, such as your example of UK housing, suffer deflationary busts when interest payments strain the repayment capacity of the debtors. Assuming your figure of 35% we are already there, I would say. At least after such a bust the houses will still be standing. The same is not the case for the breakdown of a fiat currency.   

My sentence “There’s no stopping them!” was included in my previous post purely as an idiom to amuse the reader, not as a serious statement about bank regulation.

My previous post was about general inflation, which is entirely to do with the relationship between the money supply and total wealth. When I use the word “inflation” unqualified, I mean general inflation unless otherwise stated. In this context my arguments are valid.

That said, I agree that distinct rates of inflation for differing aspects of the economy are of great importance and worthy of detailed analysis. Particularly, as you indicate, the anomalies within the official interest rate setting – inflation measurement feedback loop. Another thread, perhaps?  

A simplistic but, I hope, a stimulating thought experiment:

Let D denote the total debt outstanding on the UK housing market and V denote the total market value. What is the long term trend for the ratio D/V? Equivalently, what percentage of the total housing stock is effectively owned by the lending institutions as time goes on?

When interest rates are low, buyers can afford to borrow more heavily and bid up prices. Both D and V increase rapidly and we have a boom. Expectation of even higher V stimulates speculative debt-funded buying and V is bid up further. We have a bubble.

When interest rates are high, D will generally still increase, though now more slowly. Interest payments on existing debt increase, however less new debt is taken on by discouraged buyers. V drops as speculative buying changes to selling in expectation of further falls. We have a bust.

So, over time and through the cycles of interest rate hikes and drops, there is a ratcheting effect whereby the ratio D/V gradually increases. D rises in both phases of the cycle whereas V rises in one and drops in the other. The banks come to be owed an ever increasing percentage of the value of the housing stock.

There are many other factors that come into play, but I think this simple model illustrates a major underlying dynamic and raises questions for further investigation. For example, D can theoretically decrease with higher interest rates if buyers pay off expensive debt in sufficient volume, but maybe V would still decrease more rapidly?  

Conjecture:   Each generation will own a smaller fraction of the housing stock than did the previous one. The house-buying population as a whole is not moving towards home ownership, but rather into ever increasing home indebtedness.

Reference:  The Grip of Death  by Michael  Rowbotham

Asteve,

Yes, V is not a precise concept but some sort of estimate extrapolated from the most recently realized sale prices would do the job for the model.

Let us suppose that a mortgage-free property is inherited. We presume that V remains unchanged. If the inheritor chooses to live in it, then D also does not change and nor does the ratio D/V. If the inheritor sells it, then the buyer will most likely take out a mortgage to do so and D  and the ratio will both increase Assuming a mix of these two cases, the ratio D/V increases overall and the conjecture is supported.

I think that inheritance is irrelevant in general to the conjecture – it is just another way in which property changes hands.

If or when, as you hypothesize, V falls, then D/V increases and the conjecture is again supported. During a crash V falls but D doesn’t, in general. Prices drop but the debt remains.

Outright ownership is indeed desirable for the reasons that you state. However the number of houses owned outright is actually diminishing because mortgages are taken out for ever longer terms and also equity withdrawal is growing. A paid-off house is becoming more of a rarity. Fewer buyers now reach the winning post.