Why the Global Economy Will Collapse by 2025
In my previous post ("Growth Forecasts and The Law of Diminishing Returns"), I explained how the Law of Diminishing Returns will cause the global economy to grow at a slower and slower pace, until it starts to shrink and enters terminal decline in 5 to 20 years from now. Here's the killer chart again, which only assumes that growth will continue to obey the Law of Diminishing Returns as it has done for the past 50 years:
However, there is one aspect I did not yet consider in my analysis, which is debt. And when you do consider debt, the outlook becomes a lot worse. If you think Greece is bad, think again! At least Greece is currently being propped up by debt from other countries that are not (yet) insolvent. But, as you're well aware, debt (both public and private) has been growing across the entire global economy (not just Greece) for years, both in nominal terms and as a percentage of GDP:
Total debt now stands at about 350% of GDP in developed countries, and is still growing rapidly, even as a percentage of GDP. But that's just the start, because the Debt-to-GDP ratio itself has been growing at a faster and faster pace:
Essentially, debt is growing much faster than GDP, but much worse is that debt is growing at a faster and faster pace, while GDP is growing at a slower and slower pace. Consequently the gap between growth in debt and growth in GDP is getting wider, never mind the gap between nominal debt and nominal GDP:
Note that the total net increase in GDP minus the net increase in debt is negative 15% of GDP per year, which means that the global economy is already shrinking rapidly, except for the fact that it is currently being propped up (i.e., subsidized) by increasing debt. And the rate of decline is only accelerating...
To put it simply, the entire global economy is operating as a giant pyramid scheme, where the little growth we see is completely artificial -- an illusion propped up by increasing debt rather than genuine demand. It is no different from a company that grows its revenues by taking on more and more debt to buy its own products. Except this is much less efficient because very little of the debt translates back into growth. Even Bernie Madoff could never dream of pulling off anything this bad, on this scale.
So just how sustainable is all of this? Or rather, when will the bubble burst? Well we can actually calculate an effective return on incremental debt invested into the economy, as an increase in GDP vs increase in debt:
What we can see is that the economy is already destroying 90% of the incremental debt invested into it. Moreover, it is destroying more and more of the incremental debt, and by 2025, no amount of new debt will be able to rescue the economy from terminal decline. And unlike with Greece there will be nobody to bail us out anyway, because we will all be in the same insolvent mess together. That's when the bubble will burst and the global economy will simply collapse under its own weight. Ouch!
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10moI found this browsing the internet, and I find it extremely amusing how well it has aged. Granted at the end of the day I know nothing of economics.
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6yInteresting BBC article: http://www.bbc.com/future/story/20170418-how-western-civilisation-could-collapse
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6yGreat read. Thanks for the insight.
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7y20 years after the last collapse? Not too shabby, This time, I blame the robots.