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Debt, paralysis and economic doom

If $212 trillion sounds like a lot of money, that's because it is. According to management consultant McKinsey, it also represents the total value of equity, debt and bank loans in the world at the start of the year.

If $212 trillion sounds like a lot of money, that’s because it is. According to management consultant McKinsey, it also represents the total value of equity, debt and bank loans in the world at the start of the year.

And it’s a record, up $11 trillion on the $201 trillion recorded a year earlier, and $10 trillion ahead of the previous peak of $210 million during the credit boom.

Ten years ago the amount of debt and equity in the world was a mere $54 trillion. It is unsettling that we have been seeing a dramatic increase in the sums being wagered at a time of global economic uncertainty, when the US politicians have found it hard to agree on ways to escape from default on a mere $14 trillion of public sector debt.

Things get really worrying when you divide the debt and equity between mature and the emerging economies. Despite their enfeebled condition, mature economies saw their burden rise by $6.6 trillion over the year, while the emerging markets saw an increase of $4.4 trillion.

Debt and equity now represents 427% of gross domestic product in the mature economies. Emerging debt and equity is equivalent to 197% - or 161%, excluding China.

What’s going on? Anthropologist Joseph Tainter has studied the rise and fall of a range of civilisations. He argues increasingly sophisticated societies bring with them a stifling level of liabilities and bureaucracy that become harder to afford over time.

So lobby groups argue vociferously over their entrenched rights, often through their lawyers. Pension schemes, educations and health services become sacred cows which must not be slaughtered. Tempers rise when progress undermines property values – as we are seeing with the ferocious lobby against the quite sensible high-speed rail link being proposed to connect London and Birmingham.

It has become really tough for politicians to risk their status with voters by proposing tax hikes. As a result, years of supply-side economics have brought US tax rates down to levels not seen decades. Years of inefficient government have reduced the tax take in Greece to nominal levels. Tax evasion has become an art form in the developing world.

Even now, the expectations of western society are continuing to mount, way beyond the ability of economies to satisfy them. In the absence of tax hikes, we are using higher debt to meet them. On top of all this, Tainter says we are approaching a crisis which requires us to find new sources of energy; upgraded healthcare; better infrastructure and military incursions.

The Roman empire fended off collapse for years through plunder. But opportunities for mature economies to raid the workforces and commodities in emerging markets are diminishing, as they seek to develop their own economies.

Once its sources of plunder became scarce, Rome divided in two and, ultimately, collapsed under the weight of inefficiency, as it undermined its military efficiency.

It is hard to say when, or whether, today’s societies will collapse. The US, in particular, has considerable reserves of strength. But riots in modern Greece may yet be the shape of things to come, as governments find it harder to satisfy the aspirations of their people and justify high levels of debt to the bond market.

It is even possible implosion will happen quite suddenly. Jerome Booth, investment chief at Ashmore Investment Management, an emerging market body specialist, points out mature countries have an artificial level of protection for the simple reason that investors are stuck in the past and do not expect them to default.

“Developed country institutions are strong and older than in many developing countries. This has clear and major advantages but also disadvantages. Stability can also lead to inflexibility, an inability to react.”

Booth adds: “The lack of speed in dealing with Northern Rock in the UK was really quite shocking,” He argued that emerging countries are young enough to deal with the overheating which is taking place within their borders.

But, as McKinsey points out, they are still managing to attract the capital which they need to grow. Mature economies should be so lucky.

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