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Never Mind Unemployment; Think World War III

Written by Alex Koyfman
Posted August 20, 2015

Since the onset of the 2008 financial crisis, images of the debt clock in New York City, tracking our national debt as it adds about $10,000 per second every second, day in day out for years on end now, has become painfully familiar to most of us.

debtclock

For many, though, the concept means little — even when the inconceivable $18 trillion-plus figure is broken down to debt burden per citizen or per taxpayer ($57,000 and $154,000, respectively).

In plain terms, what this debt stands for is a pile of various financial obligations created by our government towards other governments, private entities, and even itself that will need to be accounted for at some point in the future.

Nobody likes debt on a personal level, so we automatically assume that debt on a federal level is also a bad thing... And that's correct, only the U.S. government has one trick up its sleeve that no person, government, or institution in the world has.

It has the unique ability print more dollars through its central bank — the Federal Reserve — which can then be used to make interest payments on that rapidly increasing sum, because the American dollar remains the world reserve currency — and for now, at least, it's as good as gold when it comes to transferring wealth.

On a temporary level, using this method, also known as "quantitative easing," can help fuel government spending during times when it's necessary to stimulate the economy.

Over the last seven years, however, this spending has doubled the total federal debt load, because while government spending continues, the economy isn't responding in kind.

Since that crisis, the U.S. debt-to-GDP ratio — a key metric in determining the overall robustness of the national economy — has risen from just over 60% in 2006 to over 100% in 2014.

And it continues to rise today, indicating that the recession never ended at all; it was merely hidden from sight by a constant flow of more debt.

As a nation, that means we're underwater... and with nothing to save us except more spending, more new debt, and a rapidly inflating dollar as more currency is issued to throw at our creditors while we take on more and more financial burden.

It sounds bad, and it's a spiral that we've been in for years now — making it that much worse.

There is More Debt in the World Today Than Total Economic Value

But the scary truth behind all this is that there's an even bigger elephant in the room, one most of us never even bother to think about: collective global debt.

Since 2008, total global public debt rose more than $57 trillion — more than seven times the increase in our own federal debt.

As of this year, the total figure across all nations stands at $199 trillion, with our own making up less than 10% of that figure.

Since the U.S. GDP accounts for about 22% of global GDP, it gives you an idea of just how much worse off some other nations are.

Currently, total world debt is close to three times that of world GDP. If you want to cut through all the zeros, just imagine what sort of condition your personal finances would be in if you owed three times more than you made per year and didn't have a hard asset like a home to secure that debt. 

global debt

That's where we are as a planet. As a civilization.

Now, here's where numbers and theory turn from scary to deadly... and I mean that literally.

As of the fourth quarter of last year, the world's second-biggest national economy has been making our own financial woes look like a walk in the park — and this, again, is something few people have bothered to notice.

The World's Newest Superpower, or the Beginning of the End for Us All?

China, the poster child for 21st century economic expansion, recorded total debt (national + personal + corporate debt) at 282% of GDP at the end of last year.

Even more frightening is that while the single-biggest prong of our debt is produced by the federal government, in China, it's the corporate community bearing most of the burden, with non-financial corporations alone on the hook for more than 125% of Chinese GDP.

chinagdp

Remember when I said that our government can just print more dollars to make its payments?

Well, that option isn't open to China's banks and businesses. It's not open to its government.

For China, the incoming flood of debt cannot be stemmed indefinitely or even temporarily.

And this puts all of us in a very precarious situation.

If China and, more importantly, Chinese companies start defaulting on their debt payments — which is inevitable once they cannot afford to pay the interest — the country will face economic disaster.

And I don't mean the kind we saw seven years ago. I mean a whole new category of economic collapse, exacerbated by the world's biggest and most rapid migration of people from rural life into China's mushrooming urban centers.

The kind of economic collapse that only happens when a nation's entire monetary and banking system has the rug completely pulled out from under it.

These collapses don't come around often. In fact, I can only think of one of this magnitude in the last century.

Is History Repeating?

It happened in Germany in the 1920s and 1930s.

Stunned and economically shackled by the oppressive conditions of the Treaty of Versailles after its loss in World War I, Germany's paper mark reached hyperinflation levels by 1923.

The currency became so worthless that regular citizens found themselves paying for groceries with cartloads of notes. Images like the one below became somewhat of a symbol of that difficult time, as well as a warning sign of things to come.

germanmark

By the early 1930s, with the economy now also reeling from the effects of the Great Depression, the once-proud Republic became a totalitarian one... Its only escape from that level of desperation had to come from the likes of Adolf Hitler and, ultimately, the Second World War.

Today, the Chinese empire stands on the brink of a similar situation.

Too much growth fueled by too much debt, all of it hidden, obscured, and manipulated by an infamous system of unregulated "shadow banking," has taken the country past the point of no return.

Eventually, it will need to inject new value in the system, and unfortunately, its titanically proportioned labor force is already growing too wealthy and too debt-loaded itself to pick up the slack any longer.

New value will have to come from new resources, and that's something China simply does not have.

Its neighbor to the north, however, with its giant, sparsely populated landmass and enormous resource wealth, could quite easily become China's only way out.

I don't need to get into a detailed explanation as to why a conflict between Russia and China, both nuclear powers, would affect us all.

A war with those two participants playing the key roles would spell the end of the modern age.

That is the true magnitude of the dangers we're facing.

Before you call me a fearmonger, though, I want you to understand that China is only the biggest problem — it's not the only one.

Systemic Failures, Not Isolated Problems

The world's third-biggest economy, Japan, is in even more trouble, with public debt levels twice ours.

Greece and Italy are at 175% and 132% of GDP, respectively, and are already feeling the effects of government-imposed austerity measures in the form of civil unrest.

greekroiot

Is it a coincidence that two of those three nations were members of the Axis powers the last time the world was in economic free-fall?

Make no mistake about it: Unsustainable economic systems, mass unemployment, and widespread loss of quality of life is the perfect recipe for political instability and, yes, war.

I'm sorry to say that against a problem this universal, we have no real defense.

Fortune favors the bold,

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Alex Koyfman

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Coming to us from an already impressive career as an independent trader and private investor, Alex's specialty is in the often misunderstood but highly profitable development-stage microcap sector. Focusing on young, aggressive, innovative biotech and technology firms from the U.S. and Canada, Alex has built a track record most Wall Street hedge funders would envy. Alex contributes his thoughts and insights regularly to Wealth Daily. To learn more about Alex, click here.

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