As Apple Pay and other cashless options promote easy spending, it’s time to talk about global debt
Richard Harris says the ability of mobile payments to make spending seamless is symptomatic of the easy credit in the global economy, which is closing its eyes to debt
One of the nice things about the summer is the adventure of leisure travel when, with a little extra time, so much can be learned. I learned a new way to spend money even more easily – something I never imagined was possible.
Apple Pay (as well as Samsung Pay and other mobile payment systems) is a superb way to burn cash. It comes off your credit card so quickly that you find yourself waiting at the till long after you’ve paid.
The psychology is similar to that of a credit card. If it is easy to pay, you will spend more. The cashless society is almost with us and China leads in this area. Now you can buy your fruit at a street stall using the QR code posted on the wall. Hong Kong led the way with the Octopus card, although we seemed to have stopped there. Even boring old Europe has had contactless transactions for years.
The growing ease of spending and easy credit has continued for almost 10 years now, yet little has been said reported about the rise of debt of all kinds. Bad news stories such as interest rate rises in the UK last week are quickly forgotten. Most people ignored it – only a quarter of a percentage point, hardly worth a headline. Few spoke about working people struggling with big mortgages and low salaries.
The rise in the stock and real estate markets has led to further complacency – and with just cause. Economies and entrepreneurs have made plenty of money over the last few years on low costs and cheap labour. US President Donald Trump massively stimulated the US, and therefore the world economy, with tax breaks worth as much as US$2 trillion. 2018 moving into 2019 looks pretty positive.
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But underneath the sunlit highways is a burgeoning underlying sewer of fast flowing debt. The International Monetary Fund reported in April that, at the close of 2016, global debt was worse than before the global financial crisis, reaching US$164 trillion. That’s almost 10 times the size of annual US economic output and approaching three times the size of annual world output.
The Institute of International Finance (using a non-comparable calculation basis) reported that debt at the end of 2017 was as much as US$237 trillion – 42 per cent higher than a decade earlier. Whatever the correct figure, these are big numbers.
Emerging markets average debt levels of 50 per cent of gross domestic product, their highest level since the Latin American debt crisis of the 1980s. Advanced economies far exceed these levels. US debt is projected to increase from 108 per cent in 2017 to 117 per cent of gross domestic product in 2023; China is currently at a whopping 261 per cent of GDP.
China alone has been responsible for more than 40 per cent of the increase in global debt since 2007. True, the authorities have sought to bring down their debt in the last year but you cannot reduce leverage too much without squeezing liquidity – and possibly damaging economic growth. The poor performance of the Shanghai stock market to date this year, down by 17 per cent, compared to the S&P 500’s rise of 6 per cent is a clear illustration.
Debt levels can be reduced by paying it off after a period of high economic growth, as they say, repairing the roof when the sun is shining. However, during times of economic growth, no one feels the need to pay off debt.
Debt can be inflated away – with the attendant misery that accompanies the melting of savings and the false appreciation of assets. The poor lose, the rich win.
If these two don’t happen, debt will be reduced in the worst way possible – a bankruptcy crisis. President Franklin D. Roosevelt described the pain in his first inaugural address in 1933, given during the Great Depression: “Values have shrunken to fantastic levels; taxes have risen; our ability to pay has fallen; government of all kinds is faced by serious curtailment of income; the means of exchange are frozen in the currents of trade; the withered leaves of industrial enterprise lie on every side; farmers find no markets; the savings of many years are gone. A host of unemployed citizens face the grim problem of existence.”
Confidence holds up the debt mountain. In the balmy environment of rising asset prices and growing economies, failing confidence is as real as a snowflake in summer. But when the winter comes, confidence is less assured. As Roosevelt described it, “let me assert my firm belief that the only thing we have to fear is fear itself – nameless, unreasoning, unjustified terror, which paralyses efforts to convert retreat into advance”.
Richard Harris is a veteran investment manager, banker, writer and broadcaster and financial expert witness. www.portshelter.com