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01
Feb

The Global Financial Commons

Since ecologist Garrett Hardin’s 1968 article on “The Tragedy of the Commons,” sustainability advocates have thought of the commons in a global biological context: one embracing the health of our atmosphere, forests, arable land, oceans, rivers and the creatures that live therein.

There is also a global financial commons. And it is more closely related to our biological commons than most of us think. One of the best indicators of the health of this financial commons is the total debt/GDP ratio because it suggests an economy’s debt carrying capacity. Dutch bank ING Groep recently calculated total global debt (public + private) at about $230 trillion – roughly 3X global GDP of $78 trillion – a crushing over-burden. With debt growing at more than double the rate of GDP, both commons are now in trouble.

At the time Hardin wrote his article there were no reliable statistics on global debt/GDP. However, anecdotal evidence suggests debt levels were then quite modest. Before the 1950s, if US households didn’t have the money to purchase an item, they would save for it. As the following chart indicates, total credit market debt (public + private) was then roughly aligned with GDP. (Incidentally, this chart is no longer published. Wonder why?)

chart-green

McKinsey Global Institute picks up where this chart leaves off. According to a February 2015 report on global debt, it says the total US debt/GDP ratio was 269% in the second quarter of 2014. (This doesn’t include more than $100 trillion of implicit debt due to the unfunded liabilities of Social Security and Medicare.) It also reported that global debt/GDP ratios grew from 246% in the fourth quarter of 2000 to 286 percent in the second quarter of 2014 – not far below the 3X ratio mentioned above.1

Debt as Cause & Effect of Ecological Decline

The noted deterioration of the global balance sheet is both a cause and effect of the declining health of our global biological commons. Initially, it was a cause as human consumption, accelerated by borrowing, placed extra demands on Earth resources. Beyond that, hoping to save money, we poisoned the biological commons by dumping our toxic wastes back into them. Consequently, by the 1980s, with resources becoming scarcer, and remediation costs rising, nations and companies had to speed up borrowing simply to maintain the illusion of prosperity and public health.

At that juncture the rising trajectory of debt/GDP also became an effect of resource depletion. The tragedy of both commons then entered a self-reinforcing loop, which sped up their respective declines. The fishing industry symbolized this dilemma. As fish populations depleted, fishing communities faced economic decline. Fisheries had to borrow money to buy new equipment to maintain harvests (raising the cost of fish). Governments also had to borrow to offset the consequent decline in living standards.

“In 1961, humans used only around three-quarters of the capacity Earth has for generating food, timber, fish and absorbing greenhouse gases, with most countries having more resources than they consumed … [According to] the Global Footprint Network … it would currently take 1.5 Earths to produce the renewable natural resources needed to support human requirements.”
The Guardian, August 19, 2014 2

Adding to these stresses, in the 1980s new biological and financial costs due to climate change caused global debt/GDP ratios to accelerate further. Although there are no definitive studies on such circular feedbacks, it is striking how the deterioration of the world’s financial and biological commons have become increasingly intertwined.

Global financial markets are clearly concerned. During the first ten trading days of January widely followed indices, such as the S&P 500 and the MSCI World, had their worst openings ever. Although the US Federal Reserve and other central banks have tried to disguise the increasing weight of debt on GDP by printing money (buying government debt and mortgage bonds) and by directly intervening in financial markets, the scale of the world’s fast growing debt bubble may now be beyond their control.

Global debt/GDP ratios have long been like the proverbial canary in the coal mine. For several decades they have been telling us that we’re living beyond our financial and ecological means. Now they are shaking us awake. We cannot ignore them this time.

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1 McKinsey Global Institute, “Debt and (Not Much) Deleveraging,” February, 2015. In a note of concern the report cautioned: “All major economies today have higher levels of borrowing relative to GDP than they did in 2007 … [posing] new risks to financial stability … and global economic growth.”
2 “Earth sliding into ecological debt earlier and earlier, campaigners warn,” The Guardian, August 19, 2014.











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