The world is in $300 TRILLION debt. To whom? Aliens?
The world is in a $300 Trillion (with a capital T) debt.
How come the entire world is in debt? To whom do we owe this debt? 👽 Aliens?
Reality is so much more absurd!
Let me explain 👇
World Debt is made up of three parts:
The most important and interesting is the Country's Debt. Let's start with it.
Every country has a simple balance sheet.
How much is spent on government services (health, education, social protection, etc.)
vs
How much is earned through taxes
Ideally, a country wants to have more earnings through taxes than they have to spend.
But really, spending is almost always more than the earnings.
How can a government spend more than they earn? Good question.
They take debt.
From whom?
From us. (Also from other countries; we will come to it later.)
From us? Yes, from you and me and all of us. How?
They issue what is called "Government Bonds" that anybody can invest in for very low returns and with low risk.
If you invest $100 in January, you'll be entitled to receive $102.5 in December.
"Just $2.5 more?" you ask.
Yes, but with almost 100% certainty.
The country's people lend their government money for a tiny interest per annum.
If Revenue through Taxes + Bonds is still less than Spending, governments take on more debt from other countries.
Which country is the biggest lender?
🇨🇳 China.
In total, China has lent about $1.5 trillion in direct loans and trade credits to more than 150 countries around the globe.
This has turned China into the world’s largest official creditor.
Bigger than all the official lenders such as the World Bank, the IMF, or all OECD creditor governments combined.
COMBINED!
Developing Countries face the most heat of Debt.
To repay it to their citizens and foreign lenders, they start cutting down on their spending on education, healthcare, social protection, etc.
It pushes them into a vicious loop.
A country starts cutting down on spending.
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Life becomes worse.
People's earnings fall.
Taxes collected fall.
To compensate, more spending is cut.
Eventually, a country fails. Or, to survive, it has to take on more debt.
Raising the World Debt further.
The other two parts of World Debt are simpler to understand:
World Debt = Country's Debt + Business' Debt + People's Debt.
Add it for all countries, and it comes out to $300 Trillion.
To whom do we owe this debt?
To ourselves.
What a bummer!
Let me explain how absurd it is.
Imagine any friend of yours. You lend them $100.
Now, they are in $100 debt to you.
What if your friend lends you $100 back?
Really, it should have been considered a repayment, but you are in dire need, and they will give you $100 only if you consider it as a loan.
Now, your friend is in $100 debt to you, and you're $100 in debt to your friend.
Because $100 went both ways, the total debt of the system should be $0.
However, it is $200.
The total money movement is zero, yet the debt has increased by $200.
🤯
That was the simplest system where money could move.
Add 195 countries, millions of businesses, and billions of people to the mix, and you've just made yourself The Debt Cocktail.
(Thanks, DALL·E!)
Money is a weird thing that sometimes makes no sense at all.
It's just a made-up number.
I wrote more about it in my blog. If you want to dig deeper, I highly recommend it.
***
This post was originally published on my Twitter. Follow me @mohitmamoria to read such articles before anybody else.