Debts That Cannot Be Paid Will Not Be

T Sabri Öncü  is an economist based in Istanbul, Turkey. This article first appeared in the Indian journal Economic & Political Weekly.

Total global debt has increased, growth has been slowing down since the onset of the global financial crisis in 2007 and has been rapidly decelerating after 2012. This may be a sign that the world has arrived at its debt carrying capacity or has even crossed it, meaning that capitalism is probably already insolvent.

With my June 2015 HT Parekh Finance Column article titled “When Will the Next Financial Crisis Start?” (Öncü 2015a) I initiated an investigation of the possibility of a new phase in the ongoing global financial crisis (GFC) that started in the summer of 2007. This article was retitled at the Policy Research in Macroeconomics website as “What Straw Will Break the Finance Sector’s Back?” when it was republished three days later (Öncü 2015b).

The next two articles in the series were my February 2016 article titled “Has the Crash of the Global Financial Markets Begun?” (Öncü 2016a) and November 2016 article titled “It’s the Private Debt, Stupid!” (Öncü 2016c).

The current article is the fourth in the series and its title is inspired by the latest first quarter (Q1) report of the Institute of International Finance (IIF), a respected tracker of global leverage statistics.

Time will tell whether this article will be the last in the series or not as financial markets have a way to put even the best forecasters to shame.

Total Global Debt

In this Q1 report, the IIF documented that the total global debt hit a new all-time high of $217 trillion or about 327% of the global economic output, that is, world gross domestic product (GDP). This is an alarming total debt to GDP ratio.

Furthermore, the report also indicated that while the financial sector debt issuance—although supplanted by money created by major central banks—has moderated in recent years, the total global debt of the non-financial sector has continued to grow and hit an all-time high of $160 trillion or about 242% of the world GDP as of the Q1 of 2017.

Recall that when the total global non-financial sector debt reached $152 trillion or about 225% of the world GDP at end of 2015, the International Monetary Fund (IMF) issued a stark warning to the world that the sheer size of the non-financial sector debt—comprising the general government, non-financial firms and households—could set the stage for an unprecedented private deleveraging process that could thwart the fragile economic recovery of the world, indicating the difficulty of resolving the “private debt overhang” problem in the current global environment of low nominal output growth. (Öncü 2016c)

Table 1 gives a summary of the total global debt at five-year intervals between 2002 and 2017, and shows that this ratio did not become alarming just in theQ1 of 2017. It has been alarming for at least a decade.

Table 1. Total Global Debt (Q1 of Each Year)

Year As Percentage of World GDP Amount in Trillion Dollars Percent Change over 5 Years
2002 246% $86
2007 276% $149 73.3%
2012 305% $205 27.3%
2017 327% $217 5.8%


Is Capitalism Insolvent?

The IIF said in this report that rising debt “may create headwinds for long-term growth and eventually pose risks for financial stability.”

It is puzzling that the IIF is saying this only now. Is this not what has been happening since the onset of the GFC in the summer of 2007? Has global economic growth not been dismal since 2007 to this day or is a 10-year period not long-term enough?

Have we not experienced at least two major phases of the GFC, one originated in the United States (US) mortgage market in 2007 and then spread to the rest of the world, the other originated in Greece in 2010 and then spread through Europe with spillover effects in the rest of the world?

Table 1 also shows that although the total global debt has increased in the period steadily, growth has been slowing down since the onset of the GFC in 2007 and has been rapidly decelerating after 2012. This may be a sign that the world has arrived at its debt carrying capacity or even crossed it, meaning that capitalism is insolvent already.

And, if this is the case, then a global deleveraging accompanied by increasing delinquencies and defaults will accelerate. Indeed, delinquencies and defaults have been accelerating around the globe in recent years. As Indians and Italians know quite well, their banks are already suffering from bad loans severely, and India and Italy are not the only two countries where this is happening.

Developing Country Debt

According to the earlier mentioned IIF report, while advanced economies continued to deleverage and reduced their total debt by over $2 trillion in the past year, developing countries increased their total debt by $3 trillion, bringing their total debt stock to $56 trillion. This is equivalent to 218% of their combined GDP, five percentage points above that percentage in the Q1 of 2016.

China alone borrowed $2 trillion of this $3 trillion and brought her total debt stock to $33 trillion with the country’s total debt to GDP now surpassing 300%. More importantly, slightly more than two-thirds of China’s total debt owed by her non-financial private sector, and her non-financial corporate sector owed slightly more than 75% of this non-financial private sector debt, with the rest belonging to households.

Furthermore, the IIF reported that the emerging market countries increased their hard currency-denominated debt by $200 billion in the past year and, despite the recent dollar strength, 70% of this has been in dollars. The total hard-currency denominated debt of the emerging market countries was slightly above $6.5 trillion at the end of 2016.

The IIF also reported that emerging markets had over $1.9 trillion of bonds and loans falling due before the end of 2018 with the biggest redemptions to be made by China, Russia, Korea and Turkey, and added that the rollover risk was high.

Meanwhile the Equities

Recall from my February 2016 article (Öncü 2016a) that Bloomberg data showed that the world equity markets made their highest peak at $73.1 trillion on 14 June 2015 and from there gradually crashed to $58.7 trillion by 31 January 2016.1 Bloomberg data show that global stocks had continued to struggle until 23 June 2016—that is, until Brexit (Öncü 2016b)—after which they started to recover.

The recovery gained speed about a month after the election of Donald Trump as the President of the US and has been impressive after his inauguration on 20 January 2017. The world equity markets gained $4.8 trillion in the Q1 of 2017—the largest quarterly gain since 2012—and closed the quarter at $71.6 trillion.

Although the performance of the advanced economy equity markets had walked in tandem with the global equities (as expected since they dominate the global equity markets), the performance of the emerging market economy equity markets has been phenomenal. Since the turn of the year, emerging market economy equity markets have outperformed advanced economy equity markets by at least 5%, returning more than 15% in the first half of 2017.

Given the dire signs of a fast-approaching global recession and possibly the third phase of the GFC, offering an explanation for why any of these have happened is beyond me. I will not claim that the third phase of the GFC or a global recession will start shortly, but I would not mind taking credit if one of them happens.

And, if one of them happens, the other will follow.

Let this be my prophecy.

Janet Yellen’s Prophecy

In comments at the British Academy in London on 27 June 2017, US Federal Reserve Chair Janet Yellen prophesied that the US financial system was much safer and sounder, and that a crisis like the one in 2008 was unlikely “in our lifetime.”

She prophesied this only 19 days after the House of Representatives of the US passed the Financial Creating Hope and Opportunity for Investors, Consumers and Entrepreneurs (CHOICE) Act. If this act becomes law, it will replace much of the Dodd–Frank Act passed by the Obama administration in 2010 as a response to the GFC. Despite the questionable success of the Dodd–Frank Act, the CHOICE Act will remove most of the safety valves the Dodd–Frank Act attempted to put in place.

Furthermore, Yellen prophesied this only about a week before the Office of the Comptroller of the Currency of the US published its Q1 of 2017 derivatives report. This report showed that the top-25 US holding companies with derivatives had a total derivatives exposure of $242.2 trillion whereas the said amount was $160.2 trillion one quarter before the start of the GFC in 2007 and $194.3 trillion one quarter before the Lehman collapse which made the crisis global in 2008.

Since no one debates the crucial role the derivatives played at the onset of the GFC, I can safely say that the situation is worse than it was in either 2007 or 2008.

There are a multitude of other troubles from around the globe that I cannot list because of the shortage of space, but let me respond to Yellen’s prophecy as follows:

Debts that cannot be paid will not be.


1 Bloomberg World Exchange Market Capitalisation in US dollars—WCAUWRLD—Index, weekly data.


Öncü, T Sabri (2015a): “When Will the Next Financial Crisis Start?” Economic & Political Weekly, Vol 50, No 24, pp 10–11.

(2015b): “What Straw Will Break the Finance Sector’s Back?” Policy Research in Macroeconomics, 16 June,

(2016a): “Has the Crash of the Global Financial Markets Begun?” Economic & Political Weekly, Vol 51, No 7, pp 10–11.

(2016b): “Is Brexit Moment a Lehman Moment? Fear Factor in Financial Crises,” Economic & Political Weekly, Vol 51, No 29, pp 10–11.

(2016c): “It’s the Private Debt, Stupid!” Economic & Political Weekly, Vol 51, No 46, 12 November, pp 10–11.


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  1. Disturbed Voter

    Fiat money insures liquidity, as long as there is confidence in it. That is why a confidence game is required to institute or to maintain it.

    National debts can be … renegotiated at will by State action or markets. The problem is if you are a debtor not a creditor. Also differential balance sheet relative to other similarly situated people (are you homeless?). Creditors and inequality are the threats to debtors and resource poor people. And sometimes liquidity crises. Private debt renegotiation (lower interest, forgiveness of part of the debt, asset seizure of debtor property) is particularly painful … because neither party can print fiat money at will … unless you are a major bank with an unlimited credit line to the people who can print fiat money at will.

  2. Watt4Bob

    Or, at what point do you quit calling it a ‘bubble‘, and start calling it an ‘aneurysm‘?

    Cranial-anal insertion assumes infinite elasticity.

    1. HotFlash

      Or, at what point do you quit calling it a ‘bubble‘, and start calling it an ‘aneurysm‘?

      Bob, great line, I am stealing it.

  3. jabawocky

    I have to say I’m curious about a number of assumptions in this piece. Firstly, that high debt is intrinsically bad. The question is precisely why it is bad? The context being that if all money is created by debt, debt is therefore a simple measure of money supply. Is it because high volume of debt implies risky lending? Or is high volume of low risk debt an issue? Or is high debt a proxy measure (symptom) for other malaises? Increasing debt relative to GDP can only imply increasing global savings relative to GDP. Risk occurs when transfer rates from savers to debtors is low. In this case debt volume relative to GDP could be a simple correlate of inequality for instance.

    The second question that came to mind was about the importance of credit write-offs in the global money supply. In a write-off banks lose an asset, and somebody loses a liability. However, the asset isn’t lost because the money created by that loan is somewhere. Thus each write-off creates debt-free money (or possibly that liability is transferred to central bank). Over time this should increase in the economy. Thus it is possible that write-offs have systemic importance, and are not something policy makers should try and avoid.

    Can capitalism be insolvent? The real question is does it matter if capitalism is insolvent?

    1. diptherio

      Increasing debt relative to GDP can only imply increasing global savings relative to GDP.

      Only if you believe that banks simply act as intermediaries between savers and borrowers. That notion has been thoroughly debunked.

    2. ger

      Yeah, I’ve been rolling in some of that ‘lost’ money since 2008. Sadly, I missed a chanced to roll in some of the $15,000,000,000,000 or so free money laundered by the Fed. So you say just send the debt back to the Fed and call it even!

    3. Kevin Carhart

      I think you have taken several interesting angles that I only partially understand, so I may not quite be addressing your question on the same order of magnitude on which you’re asking it, but I think high debt is intrinsically bad because like soylent green, it’s people. Right? All of the structural-adjustment stories were based on debt. I think we’re more talking about private debt in this article (and the classic SA examples are against nations), but isn’t there a principle that is also applicable to private entities, where being in debt and being given an ultimatum by creditors, that entity is in a compromised position relative to what the creditor wants? Anyone or any entity could be subject at least to an attempt at an “offer you can’t refuse”, where you engage in the household-sized or business-sized equivalent of structural adjustments, in return for forebearance. I’m partially getting this from Julie MacLeavy’s article on neoliberal unemployment-payments programs that require essentially person-sized structural adjustments in return for assistance. (UI payments are not the same as a debt, but I’m taking it as something that is seen as similar by the designers of the programs. Either way you are probably not much of a shopper.) So a high volume of debt is intrinsically bad because it’s a high volume of smaller stories and scenarios based around a power relation where the creditor gets to exhort you to engage in SA, and the priority system of SA is intrinsically bad in my opinion.

    4. AR11

      ” Increasing debt relative to GDP can only imply increasing global savings relative to GDP. ”

      WHAT? Are you serious? The beginning of you posts suggests you understand something about money, but then you go on to claim that increasing debt can only imply increasing global savings. Why? Because lending/debt comes from savings? Wrong! Banks can gin up credit/money from nothing and pump it into the economy without any real impact on GDP or savings.

  4. washunate

    What does the author mean by capitalism?

    Capitalism isn’t insolvent. Rather, it has been replaced by fascism – the authoritarian partnership of government control freaks and private sector control freaks.

    It’s not complicated at a conceptual level. We run a global empire.

    1. RenoDino

      Capitalism was insolvent when the S&P hit 666. It’s enough to make a believer out of me.
      From that day forward, fascism, as you noted, became the world’s dominate economic/political structure.

  5. RenoDino

    This is the real playground of MMT. Not the one that creates social programs, builds infrastructure, or hires millions of displaced workers, but the one that prints money to buy government and corporate debt and equities to sustain a boom in financialization at the expense of everything else to maintain an aura of prosperity and facilitate the transfer of the wealth from the middle class to the One Percent.

    This is Supply Side Financialization, shoving money out the door to those who already have billions to hopefully create demand on the lower end of the scale using the famed Laffer Curve trickle down method.

    The author is both puzzle and horrified by the actions of central banks and governments since the GFC.
    They have demonstrated a willingness to do whatever is necessary to backstop and protect the rich.
    Even massive defaults don’t have the same impact as before since all of these bad loans will be rolled over, written down, repackaged and ultimately bought by Central Banks who will let them roll off their balance sheets forever. China and Europe are leading the way in this endeavor and rest of the world is following right behind.

    Given the full, massive scope of this intervention, no one can predict how and when it will end.
    Nothing like it has ever been attempted before in the history of world finance. Everyone knows there is something terribly wrong with this picture. In the words of Talleyrand, “It was worse than a crime, it was a mistake.”

    1. readerOfTeaLeaves

      They have demonstrated a willingness to do whatever is necessary to backstop and protect the rich.

      1. They cannot do that indefinitely.
      2. They cannot do that in a world where stock buybacks have basically been cannibalizing corporate wealth for over a decade, and that corporate wealth was built on — in part — mergers and aquisitions. IOW, all financialization and very constrained R&D.

      This economic model leads to a dead end of social upheaval, despair, illness, and pervasive corruption: a mafia world enforced by laws, legislative stupidity, and judges indoctrinated into believing that the source of wealth is ‘investment’.

      FWIW, it’s nice to see such a different perspective, originating from a source that I would not ordinarily read.
      Thanks, NC.

  6. Steve

    I’m pretty sure that I have read many times that just the global derivatives exposure exceeded 1.1 quadrillion dollars back in 2011 far exceeding 217 trillion.

  7. Alex

    The rent extracting classes will likely still be ok even if there is a crash – they take money from the churn and uncertainty, not from creating real social value. More movement in “markets” just equals a higher pace of skimming.

  8. JEHR

    So finance has embarked on a global experiment where all the financial entities will eventually get bailed-out, bailed-in and recompensed from the 99%’s limited resources. At least that is what has happened so far and why should it change? So unfair!

  9. Steven Greenberg

    China borrowed $2 trillion? While holding $300 billion of US treasuries? Maybe China holds even more.

    U.S. Debt to China: How Much Does It Own?

    ===== quote =====
    China holds less than the $1.111 trillion held by Japan. Both countries have reduced their holdings in the past year, but China has reduced it faster.

    China held $1.3 trillion in U.S. debt in November 2013.
    ===== /quote ====

    Should we worry that China borrowed $2 trillion when it holds so much US debt already? How much of that China debt is in its own currency? MMT appplies to China just as it does to the US.

    1. MyLessThanPrimeBeef

      Debt in own currency.

      The one mistake I made early on was to ignore the liquidity aspect of debt.

      Maybe I could have had the money in the US currency the next day or the next month, but when the debt service payment was late, I risked defaulting.

  10. Sound of the Suburbs

    Something got lost in the neo-liberal era.

    We are missing that critical distinction between “productive” investment and “unproductive” investment when it comes to bank credit.

    Productive investment goes into business and industry; it generates the money to make the repayments and gives a good return in GDP.

    Unproductive investment goes into real estate and financial speculation; it doesn’t generate the money to make the repayments and gives a poor return in GDP.

    The UK used to know what it was doing until it went neo-liberal with Thatcher:

    The bank credit pours into real estate and financial speculation.

    The US has never really had a clue:

    1929 and 2008 stick out like sore thumbs; bank credit going into financial speculation and stocks (1929) or real estate (2008).

    Leveraged financial speculation with bank credit.

  11. MyLessThanPrimeBeef

    Debts that can not be paid will still be paid.

    When we are talking about monetary sovereigns or just sovereigns. Look at the Russian peasants – they couldn’t pay Czarist regime era borrowings (to decorate the Winter Palace perhaps0, but they still had to paid, over 100 years if necessary.

    For other countries, they might have to sell their ports, for example.

    As long as there is one taxpayer left, debts will be paid…one way or another (sell your body or national parks).

    It’s unlikely China would forgive US Treasuries if their money becomes the new hegemon currency.

  12. MyLessThanPrimeBeef

    Debts that can not be paid will still be paid.

    When we are talking about monetary sovereigns or just sovereigns. Look at the Russian peasants – they couldn’t pay Czarist regime era borrowings (to decorate the Winter Palace perhaps0, but they still had to paid, over 100 years if necessary.

    For other countries, they might have to sell their ports, for example.

    As long as there is one taxpayer left, debts will be paid…one way or another (sell your body or national parks).

    It’s unlikely China would forgive US Treasuries if their money becomes the new hegemon currency.

  13. John

    Yeah, but don’t forget: A debt that can be rolled-over is really an asset. Invest (party) appropriately!

  14. Scott

    Is all of the US strength now simply raw hard power & is Russia the enemy because it will use other currencies to trade in oil with?
    If you don’t have the bomb & plan to use your own Central Bank as was the case in Libya, you will be destroyed and executed by a sadist. I mean Gaddaffi.
    In Iraq it was Hussain, who was hung.
    Bankers out to get all the money, and all the deeds of the Greeks were threatened with having the tourist friendly ATMs cut off, and their pensioners in need of regular medications were not going to get their drugs.
    Cyber war is about controlling the assets of your adversary from afar, by remote control.
    The US Intelligence services were so intent on spying on their own citizens they made it more possible for their military not to matter.
    Everyday that Trump’s administration is in charge, there is acceleration of everything that was set in place to go wrong, becoming a more likely reality.
    Can the US win a cyberwar? Has the US won any of the wars it has undertaken since the end of WWII?
    The GOP/C.S.A. has told its people it is poor when it was at the height of economic power capable of declaring economic war on anyone.
    What is happening now is that power has been truly wasted, and the lies told about the economic state of the US will become a truth because of how the infinite currency has been spent.
    It has been spent on only wars that it can’t win, but also on war systems that don’t work, and worst of all, collecting data that is useless & simply creating a system that works to make the US weak and vulnerable.

    1. Yves Smith

      I don’t buy that currencies have anything to do with US aggression.

      Way too many countries want to run trade surpluses.

      The US is the only economy willing to accommodate them by running consistent trade deficits, ie, exporting demand and jobs.

      That means all those surplus countries must take US$.

      Until that changes, and I see no indication whatsoever that anyone has any interest in becoming the big trade deficit country (China would love the status of reserve currency but has absolutely no willingness to run sustained trade deficits) the $ will have no competitor for reserve currency status.

      1. Synoia

        I don’t buy that currencies have anything to do with US aggression

        I’d be interested in opinions and rationale for the root causes of US Aggression, and if and how they morphed over time.

      2. Thor's Hammer

        “I don’t buy that currencies have anything to do with US aggression. ”

        The US emerged from WWII as the sole surviving super-power, and as a final act, demonstrated that they were willing to use nuclear weapons against unarmed civilian populations in case anybody doubted them. In the ensuing years the US benefited immensely by having the dollar used as the world’s reserve currency. This enabled it to import oil, the true currency of industrial civilization, by simply printing dollars and receiving oil in exchange for a few digital key strokes . Far more profitable (especially for finance capital) than actually having to produce grain or cars to sell to the world and earn foreign currency to import the oil.

        The US went on to create the only global military empire, with 1400 military bases all over the world, while potential rivals Russia and China have at most a handful. I’d have to believe that the real threat posed by Russia is not its tanks and its advanced ABM missile defense system, but It’s growing alliances for trading oil and natural gas outside of the dollar system. Qaddafi’s attempts to sidestep the dollar and develop a gold-based African currency earned him a bayonet up the ass while Hillary Clinton watched on the spy satellite link and chortled insanely. I’m certain that the Democon/deep state handlers who created candidate Clinton and jerk on Trump’s reins fervently wish the same fate for Putin.

        Given this history, why do you believe that enforcing the US dollar as the world trading currency by all means necessary is not a key mission of the US military and all 17 “intelligence” agencies?

        1. Yves Smith

          Lordie. This is the best you can do?

          First, when the US started down this path, its priority was containing Communism. Eisenhower in his parting speech as President warned of the danger of the military-industrial complex subverting democracy. We have bases galore and grotesque exercises in pure pork like the F-35 because very powerfully placed insider interests have been able to create rationales for huge military spending.

          Second, the original rationale was that countries that were democracies and traded with each other wouldn’t go to war with each other and would be reliable allies against the Evil Commies. Multimational companies were thus seen as business ambassadors. Note they don’t have to be US multinationals to achieve that end. But that implied promoting trade and protecting sea lanes were a big part of the anti-Commie push.

          None of these have squat to do with the dollar.

    2. flora

      “The US Intelligence services were so intent on spying on their own citizens they made it more possible for their military not to matter.”


      The intelligence services are closely tied to the military, may even be a branch of the military, but are not the battalions and troops on the ground. Troops on the ground come first. Very much.

      The second thing is that the intelligence services have “out sourced” their staffing, in large part, to civilian contractors who may wear 2 hats (because markets): 1. work for the intelligence agencies gathering data for the govt, and 2. forward any data gleaned in their govt employment capacity to the private companies also hiring them. ( this is not tin foil theorizing.)

      So, per your comment, no.

  15. steelhead23

    This is one of those posts that gives me cognitive dissonance, as if Randy Wray is whispering in one ear while Rickards yells in the other. More sovereign deficit spending is needed to drive economic activity, yet the growing mountain of debt threatens system stability. Are these two concepts even remotely reconcilable – a synthesis perhaps?

  16. Kye Goodwin

    steelhead23, There’s a fundamental difference between the sovereign national debt of a currency issuer and private debt. Steve Keen has demonstrated that the change in US private debt, household plus corporate debt that is, has been strongly correlated with employment at least since WW2. Demand equals income plus the change in debt. Increasing private debt can temporarily increase demand until it rises to a level that can’t be serviced from incomes and profits. Sovereign national debt can always be increased without risk of default. It may cause inflation, depending on how it is spent, but there’s no reason that it should ever cause a crisis.

    1. Sabri Oncu

      Well. Please read my earlier “it is the private debt, stupid!” article. Sovereign debt in own currency is never a problem. It is the sovereign debt in foreign currency that is the problem since it is no different than private debt. The borrower cannot roll over that debt indefinitely. Today, about 70% of total debt is private debt and add to that the sovereign debt denominated in foreign currency, and you get to about 80% of total global debt. So, total global debt gives us information about total global private debt. This is why I have been using the total debt data. It was available to me. As I mentioned in this article, this is the fourth article in a series. If you do not read the entire series and only read this article in isolation, you may end up with some false conclusions about my arguments. But, I am the guilty party here. I should not have assumed that readers would go back to earlier articles and read them also. My bad. Best. Sabri

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