I am a futurist and look at this topic as a highly probable reality by the end of the decade. However, I am not any kind of a financial advisor or economist. This prediction is based on long-term trends and near-term probabilities, not any type of investment strategy.
Let’s take a look at the short history of the global economy. It first developed in the time of robber barons and the Belle Epoch in the decades before WWI. The second globalization took place in the two to three decades post-WWII. The third stage of the global economy began when Nixon went to China and China started to slowly open up to the world in the 1970s. Loosely speaking this puts the latest iteration of the global economy at around 50 years old.
Why is there a real possibility of a debt-fueled financial collapse by 2030?
In the last quarter of the 21st century, global trade and GDP were predominantly based on the manufacturing concept that value is in the production of goods and services. It was China’s capacity for cheap manufacturing that gave that country a fast on-ramp to global economic participation.
However, in the last 25 years the global economy has shifted from production to finance and financial wealth.
The percentage of global GDP that was debt in 1970 was slightly over 100%. As of 2019, that figure grew to 256% of the global GDP.
In the aftermath of the Great Recession, interest rates fell to all-time lows. By all-time, I mean just that. The low, single-digit interest rates of the last 10 years were lower than at any time in history. This list shows interest rates for the last 5,000 years:
- Mesopotamia, circa 3000 BC: 20%
- Babylon, Code of Hammurabi, circa 1772 BC: 20%
- Greece, Temple at Delos, circa. 500 BC: 10%
- Rome, Twelve Tables, 443 BC: 8.33%
- Rome, under Diocletian, 300 AD: 15% (estimated)
- Byzantine Empire, under Constantine, 325 AD: limit 12.5%
- Venice, 1430s: 20%
- England, 1700s: 9.92%
- U.S., 1940s: 1.85%
- US., Reagan administration, 1980s: 15.84%
- U.S., September, 2015: 0-0.25%
The problem is that the global economy rapidly adapted to these historically low rates. They became the new normal and people lost historic perspective on how low the rates were. At the same time, the inexorable rise of indebtedness has continued.
What is clear is that the pandemic added trillions of debt globally. As of the end of 2020, global debt was at an all-time high of $281 trillion, which was 355% of the global GDP
During the last 10 years of historic low-interest rates, governments borrowed a lot, corporations refinanced debt and bought back shares, and the real estate industry rode a rising price tide because of low mortgage rates.
The Fed has been raising interest rates to fight inflation, and these high rates will stay for a couple of years, if not longer. What does this mean?
All levels of government will have to borrow at much higher rates, crowding out spending. Corporations will have to refinance low-interest loans at higher rates. The residential real estate market will drop, if not collapse, and consumer debt will become much more expensive to carry.
On a global level, the ratio of total debt to global GDP will increase as the global economy has dramatically slowed due to the zero-COVID policy in China, expectations of a global recession in 2023, and the land war in Europe. As the global economy is dramatically slowing, the cost of taking on debt is dramatically increasing.
Finally, there is the reality of ever-higher government deficits. The total outstanding federal debt in the US is now more than $ 31 trillion.
This means that the US has been spending close to $1 billion in interest daily at historically low rates. Now, these rates are going up. What could go wrong?
The current high rate of inflation will mask these problems in the near term, but when it drops down by the end of the first quarter of 2023, we will probably enter a period of slowing inflation, slowing or no growth, and increased debt costs.
Throw into this pot the ever-increasing costs of climate collapse, a continuing land war in Europe, and the massive move from fossil fuels to clean energy – all of which will require some level of borrowing – and it could be a recipe for a debt-triggered financial collapse.
As a futurist, I have waded into financial waters a bit more than usual. But when I look at the long-term trends of the last few decades, combined with the disruptions of the 2020s it is hard not to see some form of global debt financial meltdown.
When? My best forecast is sometime in the second half of the decade, 2025-2030.
Dead ahead.
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