11 - THE GOVERNMENTS DEBT TRAP

THE GOVERNMENTS DEBT TRAP

Introduction

Any economic activity requires 3 things: Land, labour and capital.

For most large scale activities on earth, the person doing or organising the activity does not have the capital and so that person will borrow the capital from a bank, from a relative or partner, from the local government or from the state in the form of a loan. This creates a debt for the operator which will have to be repaid over time by future activity and future income.

Interestingly, debt existed long before money was invented. The first form of debt in history was verbal promises. For example, if I needed help cutting wood in my garden, I would ask my neighbour for help. In exchange for his assistance, I would promise to help him in the future when he needed support. This is a moral debt, not usually written down, nor expressed in monetary terms or physical objects.

Physical trades, with or without a means of exchange, emerged later, particularly for exchanges between different tribes. Initially, it was a direct exchange of goods, but this implied an immediate transaction. To avoid delays in payment, people introduced a common means of exchange that was accepted by different individuals, retained its value and could be used over time: money.

Initially, money took the form of tangible items such as food, wood, animals and tools. Then, money became precious metals, which were easier to transport and trade. Finally, money evolved into IOUs (I Owe You), pieces of paper that hold recognised value within a given community. IOUs can be bonds from institutions, signed letters of debt recognition, or dollar or euro notes or coins, for example.

Lending and borrowing have existed in one form or another in all civilisations for centuries. From the butcher securing money for his customers to the local shopkeeper accepting less than 100% payment upfront, short or long term borrowing has been a part of our lives for some time. It is not a bad thing in itself. When you are 25 and starting your active life, you have no money but a lot of energy and ideas. You need a new house, a new car, but you don't have the savings to buy them upfront. Borrowing allows direct financing, while the lender receives a tax on the risk taken in the form of interest. Debt is actually a good thing. It became very popular after the industrial revolutions: Retailers found a way to boost their sales by offering items for a small upfront payment and a regular monthly fee, allowing the end user to buy items they could not afford at the time of purchase. It's the beginning of consumer credit as we know it.

What is money and what is debt?

Money or currency is 3 things: A means of measuring value, a medium of exchange and a store of value.

A means of measuring value (or unit of account) because when one house is on sale for $200,000 and another for $400,000, you know that the second house is twice as valuable as the first, so money enables you to compare the value of things.

A medium of exchange because if you are a fruit producer selling at the town market, you don't want to exchange your fruit for wheat, vegetables or whatever the customer has; you want to exchange it for a note (a dollar or euro note) so that you can buy whatever you need with it at another moment of time. The more widely the money is adopted and accepted, the more usable it is a medium of exchange. Gold and the US dollar are internationally recognised and accepted as payment, while the Polish zloty is mostly accepted only in Poland, and Bitcoin is only accepted officially for payment in a few places and countries so far and only a few people embrace the Bitcoin technology.

Storage of value is important because when you sell $300 worth of fruit in one day, you don't want to spend it all immediately. Maybe you want to spend it progressively over the next week or month, so the dollar note must retain its value for at least a month. Long-term value storage is a real problem for fiat money, but it keeps its value for at least a week or a month. Bitcoin is far too volatile to be used as currency right now because it can easily fluctuate by 10% every week. Gold retains its value, but it is not convenient for payments because it is difficult to divide a gram of gold into ten equal pieces of 0.1 gram.

Debt is a commitment to future returns, a claim on the future: a claim on energy and material consumption, activity and income, part of which is redistributed to the debt holder or creditor. That's why debt is very risky, because it's a commitment to the future, which is inherently unpredictable. If someone buys a house and uses 30% of their income to pay the mortgage, they are forced to get a job every month that pays enough to cover that debt. If you happen to earn more, fine, but if you happen to lose your job or get a pay cut, or if you have other expenses to pay as well, you can quickly get into trouble. A country's economic activity rarely changes by more than + or - 5% on an annual basis, so government debt is considered the safest form of debt. But if a COVID crisis suddenly cripples a country's output, it will face a large budget deficit for the year and will have to turn to lenders for new government debt. In this chapter, I will mainly present statistics about the USA, but bear in mind that the situation is very similar in all other industrialised countries. The USA simply has more data available and is the reference country for the economy. What is true for the USA is also mostly true for Europe, Japan, Australia, Brazil, Russia and any other developed country.

You can see in Figure 1A below that the US debt was fairly flat until 1980, then it started to grow slowly until the 2008 financial crisis, which was solved by pumping trillions of money into the economy via new debt, and since then the debt has grown exponentially and there seems to be no way out: Every year a new deficit, often bigger than the year before.

Again, most of the charts in this chapter will show US data, but the exact same pattern applies to most of the world's developed economies.

Figure 1A: US government debt since 1945

A better measure of debt than the absolute debt in dollars is the relative level of debt compared to the GDP, which represents the size of a nation's public debt relative to its economic output. The debt-to-GDP ratio is the key indicator of public debt levels because it compares debt with what the country can service through economic activity. It is similar to comparing a rent or mortgage rate to one's salary in that it provides an assessment of one's ability to pay rent or a mortgage, or a country's ability to service public debt. Figure 1B below shows that the average debt-to-GDP ratio for the G7 nations (the seven biggest economies in the world) has steadily increased since 1980.

Figure 1B: Average debt-to-GDP ratio of G7 countries

GDP (Gross Domestic Product) is a key economic indicator that sums up the value added by an economy. It is technically calculated by adding several measures: The total consumption of people in a country; investment made by individuals and businesses; total government spending (including public employee salaries); and the sum of trade exports, minus the sum of trade imports. As you might imagine, GDP is very difficult to measure accurately at a national level and is subject to some arbitrary considerations or assumptions.

You can actually see the 3 phases of debt growth in the US better on the graph bellow, in figure 1C. What is true for the US is also true for Europe and all industrialised countries. From 1950 until 1980, GDP growth (green curve) was driven by strong growth in energy consumption (yellow curve), which led to more purchasing power and higher quality of life. Debt remained mostly flat. From 1980 to 2005, GDP growth was driven by a slight increase in energy consumption and a substantial increase in debt (red curve). Since 2008, GDP growth has been driven only by a sharp increase in debt, while energy consumption has remained flat. This means that the growth is entirely artificial, by pumping money into the system that inflates asset prices such as property and equity valuations, but does not inflate the median standars of living or the purchasing power of ordinary citizens who earn money through hard work and earnings, but rather increases the wealth of people who own large amounts of capital and assets.

Figure 1C: The three phases of US government debt since 1945

What are government debt and treasury bonds?

The way you think about money as a household is very different from the way the government uses money.

As an individual, you work to earn money and then spend that money you have on goods and services and pay your taxes. You can only spend money once you have collected it in your bank account.

For governments it is different because they can print money, they can literally create money, their only concern is employment rate, which private sector to incentivize, which public sector to spend the tax money on, how much to tax each individual and business and making sure there is no high inflation to ensure confidence and stability in the economic system.

The government actually spends the money first and then collects the taxes. the government plans a year in advance what it will spend the following year. At the end of the fiscal year, the difference between what it spends and what it collects in taxes is the budget deficit, and this gap is closed by borrowing, technically by issuing Treasury bonds. In 2024, if the US government has 7 trillion in spending and 5 trillion in tax revenue, it creates the 2 trillion shortfall (the budget deficit) by issuing 2 trillion worth of Treasury bonds.

A treasury bond is simply a piece of paper that says "the government owes you money". The government rewards you for holding the bond with an interest payment. The maturity of the bonds varies from 3 months to 30 years. If you buy a $100 bond with a maturity of 10 years and an interest rate of 4%, you buy the bond for $100, receive $4 in interest each year, and after 10 years the government gives you back your original $100 and the bond is destroyed. Bonds can be bought by private investors, private or public funds, but also by the central bank. If it is the central bank that buys the bond, the money is printed or created from nothing and added to the economy.

The principle of treasury bonds is a bit like an entertainment company, such as a movie theatre or concert promoter: The customer buys a ticket in advance or at the box office. The ticket is like a treasury bond: the company owes you a performance for your eyes and ears. once you enter the arena and sit down for the show, the ticket is destroyed and is immediately worth nothing.

In theory, you can have unlimited debt by issuing more and more government bonds each year, which private investors or the central bank will buy.

The problem is that both options are dangerous if overdone:

In the 1st option, if a government has to sell a huge amount of bonds in order to find the necessary private investors and entice them to buy, to convince and attract all the investors required, the investors will demand a higher interest rate and the government will have to raise the interest rate it sells the bond at in order to entice them to buy more, leading to a vicious circle of borrowing more each year to pay the interest on previous debt and accelerating the rise in interest rates, a kind of vicious circle called debt trap.

In the 2nd option, if the central bank buys these bonds, it is literally injecting new money into the system out of thin air, and all things being equal, if you inject more money into a closed system of finite supply and demand, a finite number of buyers and sellers of goods and services, prices will rise simply because there are more dollars circulating in the economy, leading to currency debasement, loss of purchasing power and inflation.

Interest rates

Interest is the price of money over time. An interest rate is the equilibrium at which both lender and borrower are willing to enter into a transaction.

The interest rate is the price you pay over time to maintain your purchasing power.

If I lend you $100 today and you pay me back in a year, and if I can buy 50 oranges for $100 today, but expect to be able to buy only 45 oranges for $100 in a year, then I will ask you for $110 in a year so that I can still buy 50 oranges in a year. That 10% increase on the return is the interest rate.

Figure 1D below shows the (short-term) interest rate set by the central bank in each country at the beginning of 2025. The interest rate set by the bank is correlated with the stability of the economy, which is associated with the inflation rate and the annual economic growth (GPD).

Figure 1D: Central bank interest rates around the world in 2025

Now, if you are in banking or finance, you have access to huge amounts of capital and credit. You can easily get $1 million for about 3% interest, invest it in a business, stocks, real estate that earns 7% a year, and you take the difference of 4%. That's $40,000 a year without doing any work yourself, just for taking the risk and doing the paperwork and letting other people actually do the work.

This is why 10% of American GDP is in finance and finance jobs pay on average 5 times more than median jobs, why many graduate engineers prefer to work in finance rather than industry, why more debt is used for financial engineering rather than business investment, why two third of world income is passive ownership and interest, why wealth concentration is soaring. Yes, 66% of world income is made from passive income or unearned money, from owning, investing and capital interest, while only 33% of world income is made from actual compensation for work. Think about this crazy stat twice.

In Saudi Arabia it is forbidden by law to use money to make money. Money can only be invested in businesses. On the contrary, the western world has allowed this huge and unfair system that creates more inequalities because lawmakers and ultra-rich people of influence are the ones who benefit from the ultra-financialisation of the world.

Let's face reality: The top 30 CEOs of Big Tech, Big Oil and Gas, Big Pharma and Big Banks have far more influence in the world than all the world's politicians combined because they control money, energy, health and social media and our data. That's far more powerful than controlling a tax rate, public spending or an immigration law.

The impact of interest rates

There are 2 types of interest rates: The short-term interest rate, which is set by the central bank, and is the rate at which private banks can refinance themselves with the central bank. The long-term interest rate is the rate on treasury bonds, it is set by the market through the laws of supply and demand, and is basically the rate you get when you take out a mortgage to buy a house.

The central bank can raise or lower the short-term interest rate at any time. This is a powerful tool that can have a significant impact on the economy. The long-term interest rate tends to follow the short-term interest rate more or less closely, but it is also impacted by the inflation and GDP growth rates. The mechanism is quite complex, so I won't go into too much detail here. Bear in mind that the long-term interest rate on treasury bonds is set by the free market of lenders and borrowers. Usually, the 10-year reference bond has an interest rate equal to the sum of the expected economic growth rate and the expected inflation rate.

The central bank can raise or lower the intra-bank lending interest rate, thereby affecting the economy of a country.

Lowering interest rates:

+ Makes it easier and cheaper for businesses to refinance, helping them to grow or survive, which stimulates the economy.

+ Increase the value of housing property, as the rent now better covers the interest payment on the mortgage, making house buying a better deal.

+ Creates financial bubbles and can lead to inflation if credit is easy and cheap to obtain, if that credit is spent on consumption.

Raising interest rates:

+ Gives an advantage to capital and assets owners with cash flow from earnings over new startups raising money to establish themselves.

+ If a country has a high debt-to-GDP ratio, it increases the government deficit in a downward spiral simply by paying high interest on high levels of debt.

+ Tends to limit long-term resource extraction (energy and materials) and infrastructure investments like nuclear power plants or housings. New mines or big infrastructures require a lot of capital upfront and several years to start producing, so high interest rates de-incentivise starting new projects, which limits supply growth and pushes up commodity prices in the long run.

+ Discourages new home construction and home purchases, leading to higher rental prices in the long run due to new house building shortages.

Money creation

There are only 2 ways to create money, I mean actually create and inject new money into the system, and both involve debt: The first is when a private bank lends money to a customer, for example, this would apply when an individual buys a house via a mortgage or when a business receives credit money from an investor via a private bank. The bank is not redistributing its own funds, it is actually creating money that does not yet exist in the form of a loan given to the customer who has to repay the loan with interest. The second way money is created is when the government issues treasury bonds to finance the nation's budget, such as public spending, subsidies, public infrastructure, health and social services, and so on, and when the central bank buys that treasury bond, it has to create the same amount of cash to buy the bond and add it on their balance sheet. The central bank can technically print an unlimited amount of money to buy those treasury bonds. In general, more than 90% of new money is created when private banks issue loans. Fewer than 10% of the money supply is created when the central bank purchases a treasury bond.

The difference between the 2 forms of debt is that the first, from private bank to private customer, is considered risky, so the borrower is carefully selected and in most cases the borrower has to continuously repay the capital in addition to paying interest. But with government bonds, because they are backed by the nation and considered safe, only the interest is paid. The treasury bond is like a loan, and when the loan matures after X years (X being 1 to 30 years), a new government bond is issued to a new lender to repay the first bond issued X years earlier, so technically the debt is never repaid, just rolled over to a new lender. To pay off a government debt, the government would have to run a budget surplus in one year and use that surplus to pay off past debts, which has hardly happened in any western country since 2000. Argentina and Greece are some of the rare recent exceptions. The level of debt is directly related to the amount of money created by debt and is directly related to the amount of money circulating in the economy. Figure 2A and 2B below show the measured M2 money supply, which is the amount of money actively circulating in the economy.

Figure 2A: Money supply M2 in US dollar and Euro

Figure 2B: Money supply M2 in US dollar and Euro

Since 1980, around 7% of new money has been added to the economy. Some year like in the early 1990s, almost no new money is created, and some years like in 2020 and 2021, 20% more money is created, but on average, between 4% and 8% of new money is created each year.

95% of this new money is created by private banks, seemingly out of thin air, when asset owners, other banks, hedge funds and pension funds request a loan by offering an asset as collateral in order to raise credit. However, this money is then used to invest in and purchase other assets, such as equities, companies, real estate and gold. In reality, it is estimated that only 15% of this money enters the economy in the form of salaries or consumption of goods and services, while 85% simply increases asset valuation, pushing up asset prices and making wealthy people even wealthier. This is why the famous saying is absolutely true: the rich are getting richer and the poor are getting poorer.

Figure 2C: Top 0.1% compared to bottom 50% in the US

The result is that, if you take 1,000 random people in the USA, the wealthiest person of the group owns 6 times more than the poorest 500 people combined, as shown in Figure 6 above. An incredible and ugly wealth inequality is growing exponentially fast worldwide via the credit and money creation system, in which only asset owners grow their wealth fast through money creation, while non-asset owner stagnate or decline slowly in wealth and purchasing power.

Balooning budget deficit

Until 1980, countries and governments in the industrialised world ran fairly balanced budgets, with government debt amounting to around 10–30% of GDP in most countries. Then, led by the oil crisis of 1973–74, something changed. Clever politicians saw the magic trick they could perform: Run a deficit through government debt and spend that money on things that would appeal to the public: social spending, attractive promises to win votes, and overspending that would keep the system going in good times and bad times. Any spending was a good way to win votes and popularity, making the government loved by the people, whether it was spending on economic stimulus, energy production, pensions, public infrastructure or the military. This kind of spending became a habit, and soon every government was running a budget deficit every year. There was no going back. Once a bad habit has been formed, it is very hard to break. When people get accustomed to any government support, cutting off this support would lead to massive protest and unpopularity so the governments need to keep this spending and even add new ones to get votes. Even the opposition had to outbid the incumbent with even more spending promises in order to stand a chance of being elected, leading to exponential spending in both good and bad times. This is how politicians endear themselves to the public and get re-elected. The population became accustomed to this spending spree and developed an addiction to it, meaning that any budget cuts were met with protests and seen as unpopular. Consequently, every government had no choice but to spend more and more each year.

The problem is that debt is not used for future growth, but for current one-off spending that adds no economic value in the future. Remember that debt is a claim on the future, so the more debt you take on, the more future growth you need. When billions are spent on assets like a motorway or a new bridge or a new nuclear power station, we know that this will generate more income and economic growth in the future: the new motorway and bridge will get people to their jobs faster, increasing productivity, and the power station will enable new economic activity that will generate jobs, income and taxes for future GDP growth. All this is fine. The problem is when you run a deficit and spend into the current system for maintenance, like pensions, hospitals, police, one-off pandemic cheques, etc. An 80 year old receiving a pay cheque from the government is not going to provide economic growth to society 5 years from now. Don't get me wrong, I'm not saying we should abolish pensions and have no public hospitals. I am saying that this "social" welfare spending should come from a balanced budget, from a balance sheet with an equilibrium between tax revenues and public spending, where spending comes from current taxes. If new debt is incurred, it must contribute to economic growth in the future, it must contribute to income or productivity in the future, otherwise, if it is used for maintenance and to keep the system afloat, we are doomed to not be able to repay the debt.

Unfortunately, this is what is happening in most industrialised countries today: More debt is incurred for "maintenance" activities that do not increase economic output. Debt is accumulated and spent because it is technically impossible to repay. The debt growth rate is faster than the economic growth rate. We are in a debt trap, and there are only very painful ways out, not easy ones, as Figure 2D below shows.

Figure 2D: Budget deficit of China, USA and Euro countries over the last 25 years

The US had a budget deficit of 7% in 2023 and in 2024 again, in a growing economy without a major crisis. The US is currently on track to create $3 trillion of new debt every year by issuing Treasury bonds and printing money into the system. That's $7 million every minute, or $130,000 every second. If this money were 'printed' in notes by machines rather than digitally by computers, I am not even sure that the machines would be able to keep up the pace of printing 1300 notes of $100 every second. This is astonishing, an unfathomable huge number, an unprecedented rate in human history. In France, the public deficit was 5.5% in 2023 and 6% in 2024.

GDP, inflation, treasury bonds and interest rates

Without going into too much technical detail, for the sake of the general reader's understanding, we need to clarify some concepts with simple explanations.

GDP is the sum of a country's economic activity, a kind of sum of the value added margins of all companies and entrepreneurs.

Inflation is a measure of how much things are getting more expensive from year to year. It is calculated on the basis of a typical basket of goods and services, such as rent, energy bills, food, etc., and compares the price of things with the previous year. The GDP growth reported in the reports already includes inflation. Imagine a country's GDP is $100 in 2022 and $105 in 2023, while inflation is measured/calculated at 2%. The nominal GDP growth is 5%, but because 2% is inflation, the announced official GDP is 3%. The economy of this country has grown by 3% between 2022 and 2023.

There are two types of interest rates: Short-term interest rates set by central banks, which are used to refinance banks and businesses, and long-term interest rates set by market forces of supply and demand, which is the rate international investors get when they buy a government bond.

The short-term interest rate set by the central bank is a fine balance between economic growth and taming inflation to control a country's economy. By lowering the interest rate, you encourage investment, making credit cheaper and boosting the economy. By raising the interest rate, you encourage saving, make credit more expensive, thereby reducing money creation and lowering inflation.

Interest rates on government bonds are usually expressed in terms of a 10-year bond. As an investor, if you buy this government bond by lending money to the government, you will receive an interest payment every year for the next 10 years, and you will get your initial capital back in 10 years. The interest rate on government bonds is dictated by the market, by the law of supply and demand, and is usually equal to GDP growth plus the average inflation expected over the next 10 years. Going back to our previous example, if the inflation rate is 2% and the growth rate is 3%, which is what the market expects for the next 10 years, then the interest rate on government bonds (treasury yield) will be 5%.

Figure 3A below shows the evolution of the euro and US dollar central bank interest rates, and Figure 3B below shows the US and German government bond yields.

Figure 3A: EUR and USD central banks interest rates

Figure 3B: Government treasury bond yield rate of USA and Germany

In countries with persistently high inflation, the interest rate is also high, reflecting this expected inflation and the depreciation of the currency. That's one reason why the government tries to fight inflation, not only to maintain the purchasing power of its citizens, but also because it wants to be able to borrow more money at low interest rates to finance its budget. In a world where more and more government debt is needed each year to attract new lenders, the market will have to adjust interest rates higher and so the debt burden (the interest rate) will most likely continue to rise, putting more pressure on tough budget decisions or forcing more debt.

The inflation rate can be distorted and easily manipulated by the government. Inflation for me is different from inflation for you. If person A spends 30% of his salary on rent, 20% on food and 20% on energy bills, the inflation felt and measured in person A's bank account will be different from that of person B, who spends 40% on rent, 10% on food and 15% on energy bills, because the prices of different goods and services do not rise at the same rate. In every country, official inflation is measured against an imaginary, arbitrary basket of goods and services, but nobody actually spends exactly like the average person consuming that arbitrary basket. And if a given year, energy becomes 50% more expensive, if the arbitrary basket contains 20% of energy bills, the government can always decide to change the basket and reduce it to 10%, so that the big 50% increase in energy prices has less impact on the overall calculated inflation rate. There is no universal law for the contents of the basket. See below the inflation basket in the US and in the EU in Figures 3C and 3D respectively. There is also a price reference "last year" for calculating inflation, and this reference can be arbitrarily changed to "last 5 years", so the calculation of the inflation rate can be slightly distorted. Remember that GDP growth includes the inflation rate, so if you can "manipulate" the inflation rate, you can pretend to have more growth than you actually have, and showing a good official growth number is essential to attract investors and stabilise the markets, which means lowering the government interest rate.

Figure 3C: Inflation basket in the USA

Figure 3D: Inflation basket in the EU

For example, you can see that in Europe we only take into account 13% of the inflation basket for food and drink and 24% for rent and energy consumption at home. I can guarantee that the majority of Europeans spend 30% to 40% on rent and household energy bills (water, electricity, heating) and probably 20% on food and drink. The lower the income of the household, the higher the share of food and drink, rent and energy bills. This basket share means that if the price of rent and our heating and electricity bills were to double in a year, all other costs remaining equal, the announced official inflation rate would be +24%, whereas in reality for most Europeans their real inflation will be around +35%. That's how the government can pretend that we have lower inflation and better GDP growth than we really do, and consumers feel much more of their loss of purchasing power.

Another example is that interest rates are not included in the US CPI basket. When mortgage rates and car loan interest rates increase in the USA, this is not reflected in the inflation calculation. This results in official inflation figures of 4.5% in 2021, 8% in 2022, and 4% in 2023. However, according to a publication from the IMF (International Monetary Fund), for Americans with variable mortgage rates and car loans, the actual or alternative felt inflation rate is much higher: 4.5% in 2021, 11.5% in 2022, and 14% in 2023 due to the increase in interest rates in 2022 and 2023, much higher that the official statistics. This has caused many Americans to feel a disconnect between the official inflation statistics and the consumer sentiment and real life inflation. It has led some Americans to default on their mortgages and car loans, resulting in forced sales of their properties.

Misleading and manipulated statistics

The CPI (Consumer Price Index) used to calculate inflation is flawed because it excludes taxes and under- or over-weights some basic expenses such as food, shelter and energy bills, so the basket is not representative of a modest person. The CPI does not reflect the loss of purchasing power of modest people. If the CPI says 2.5%, the real felt inflation or loss of purchasing power is closer to 5%.

To calculate the inflation of rapidly evolving products, we take the technology and performance into account. For example, the processing capacity and camera performance of an iPhone today is far better than it was 10 years ago, so we consider the latest iPhone to be twice as good as the latest iPhone from 10 years ago. If the latest iPhone sold for $600 ten years ago and sells for $1,200 today, we would consider the inflation rate to be 0%, as you are getting a better product today with better performance than 10 years ago. We consider the higher price as better quality rather than inflation.

However, the reality is that you cannot buy or use the 10-year-old iPhone, so essentially, you have to pay the higher price, and $1,200 today represents a much larger proportion of the median salary than $600 did 10 years ago. This is why official inflation statistics show 2% or 3% inflation per year, while for low-wage earners, it feels more like 5% or 7% per year. Consider rent, fast food, cars, health care costs and energy bills and hairdressers: prices have definitely increased much more than the officially announced inflation rate over the last 15 years.

Also, because a country's announced GDP growth takes into account inflation as measured by the CPI, it leads to misleading statistics. The US announces GDP growth of 2.5% in 2024, based on CPI inflation of 2%. This means that nominal GDP growth between 2023 and 2024 has gone from 100 to 104.5, and from the nominal growth of 4.5%, 2% is subtracted as inflation, and so 2.5% is considered "real" growth. But if real inflation, measured in the purchasing power of a modest American, is actually 4% rather than the official figure of 2%, this means that real GDP has gone from 100 to 104.5 while real "felt" inflation was 4%, so real GDP is actually growing only by 0.5%. The US is actually closer to a recession in terms of the purchasing power of ordinary Americans.

What this means is that the government is inflating away the debt, manipulating the statistics to officially announce good results so that they can put on a good face, stabilise the markets and get re-elected. But the reality is that a modest American is losing purchasing power every year, while a fairly rich American who owns a business or has easy access to credit is making a nominal margin of 6% to 10% a year, which at least beats real inflation, and this effectively makes the rich richer and the poor poorer.

If governments make public investments in grid, road or energy infrastructure, this is counted as GDP. Basically, any government can incur 1 billion of debt, spend it on public infrastructure, and the GDP automatically increases by 1 billion. Whether the billion dollar project is useful, makes sense or whether it will increase future productivity is irrelevant. This has created an imperative for many countries to keep spending on public infrastructure, regardless of the project, just to maintain the GDP and growth rate. However, by doing this, debt piles up and becomes an unsustainable burden.

Public and private part of GDP

Another important point: When a government pays the salaries of firefighters, police or nurses in a public hospital, the goal of these services is not to make a profit, but these services are essential to society, so the way we count public spending in GDP is to simply add all the salaries and public spending to GDP. Yes, the salaries of public employees are part of GDP, along with other public expenditure. The government can literally raise the GDP at will on paper by using tax money (public spending) to hire new public employees. See below on figure 3E.

Figure 3E: Contributions to US GDP by sector in 2021

In Europe, 40% of GDP is actually public spending. France has the record in Europe with around 60% of total GDP in public spending.

Hiring more nurses and policemen increases GDP, which is great from an accountant's point of view. But you are supposed to spend what you have and invest only in future gains. This spending on public GDP is supposed to come from existing current revenues such as taxes, mostly from business taxes, payroll taxes and VAT on transactions. It creates a loophole for the government that can lead to future economic disaster: A government can artificially increase GDP by issuing new debt and using that money for public spending and paying salaries to employees of public institutions. These salaries are added to GDP, and it looks like GDP growth on paper, but it is not growth in economic activity, it is simply growth in debt, which will not provide any direct economic growth in the future.

In Europe, the public side of GDP tends to grow relative to the private side, partly because of increases in health care, social benefits and the retirement of the baby boomers. As explained earlier, this puts more pressure on the national budget, as less private income has to finance more public expenditure, and the only solution is to create more debt and more public deficit.

The Keynesian multiplier demonstrates how government spending can stimulate economic growth and job creation beyond the initial expenditure. John Maynard Keynes introduced the concept of the multiplier during the 1930s, linking it to the impact of increased government spending. For example, if a factory owner pays an employee, that salary will be spent on food. The farmer who receives this money will then spend it on new tractors, which will help to employ people in a factory. The same dollar will change hands several times — that's the Keynesian multiplier. When governments support poor people by paying a minimum wage, minimum unemployment benefit or small pensions, or when a country makes public investments in infrastructure, the money flows into the economy and generates multiple times (greater than 1) the original investment.

However, when high unemployment benefits or high pensions are given to relatively wealthy people, when companies prioritise public subsidies over market share and growth, and when the top 5% of the wealthiest people receive public money and control most of the money supply, the money simply goes into assets, boosting their value without generating goods or services. This does not create demand or flow from hand to hand; it simply causes the price of assets to increase, making asset owners wealthier and exacerbating social inequalities without generating more value or jobs. In most industrial countries, we have reached a point where the Keynesian multiplier is below 1: We need $200 or $300 of public spending via debt just to make the economy grow by $100.

Debt to GDP ratio

The debt-to-GDP ratio is a simple measure of a country's economic budget burden and its ability to sustain interest payments on its debt. When a person goes to the bank to get a loan to buy a house, the bank compares the price of the house (debt for governments) with the regular income of the buyer (GDP for governments) to assess the financial capacity of the potential buyer to repay the mortgage. The same measure for government is the debt-to-GDP ratio.

Figures 4A, 4B and 4C below show that most developed countries are close to or above 100% debt to GDP.

Figure 4A: Governments debt to GDP ratio across the world

Figure 4B: Debt to GDP ratio across the world

Figure 4C: Debt to GDP ratios by country

Figures 4D and 4E below show that the debt of all countries in the world and in Europe respectively have grown faster than GDP, and this is particularly true for the richest countries.

Figure 4D: Evolution of debt to GDP ratios in the world

Figure 4E: Evolution of debt to GDP ratios in Europe

The debt-to-GDP measure is far from perfect. A better way to measure the debt-to-GDP ratio would be to look only at the ratio of private sector debt to GDP, which is a better assessment of the future growth of the economy. Another way would be to subtract the government deficit from GDP to get real internal GDP growth. For example, if the US has GDP growth of 3% in 2023, but a budget deficit of -7%, real internal growth will be -4% (recession). To put it another way: The US had to spend 7% more than its tax revenues in new government debt just to achieve 3% growth. This means that economic output has actually fallen by 4%, there has been more maintenance spending than internal growth.

National and international debt owners

One final point on debt ownership. A key question when things become unsustainable will be: Who owns the debt? If the debt is owned by private national entities or national insurance companies, then the debt stays in the country, and so the profits and the burden of interest rates are simply passed on to the next generation, and the country cannot go bankrupt, it is just a transfer of wealth from one entity to another. But if the debt is owned by other governments of other countries, then the interest rates are going out of the country, so the wealth is going out of the country, and the people and the society of that country are going to become poorer over time because the value added of the economy is slowly being transferred to another country. that's why debt-to-GDP alone is not sufficient to assess the financial health of an economy, you have to look at who owns the debt and whether the owner of the debt is internal or external to the country.

Figure 4F below shows that 25% of US debt is held by foreign countries and 15% by the central bank (the Fed, Federal Reserve). In Europe, 17% of debt is held by foreign creditors, while 27% is held by the central bank (the ECB, or European Central Bank). By way of comparison, the eurozone's debt-to-GDP ratio is 90%, while the USA's is 120%. Japan has the highest ratio in the world at 270%. However, only 8% of Japan's debt is held by foreign creditors, compared to 17% for the eurozone and 25% for the US. Some European countries have a significant proportion of public debt owned by foreigners and foreign creditors. Notable examples include France (55%), Germany (50%), Spain (40%), the UK (30%) and Italy (27%). The greater the proportion of foreign holders, the more added value is drained from the local economy, and the less confidence foreign investors have in this country. The greater the central bank's share, the less appealing is the economy to invostors, and the greater the risk that money creation by the central bank will lead to high inflation.

Figure 4F: Government debt owners in USA, Euro zone and Japan

Figure 4F above shows that 23% of US debt is held by foreigners in 2023, while it was 40% about 10 years ago. In the Euro zone, the figure is 17%. The higher the figure, the higher the risk of defaulting on these payments in the future, which would lead the country into international insolvency. For domestic debt, the government could, in extreme cases, technically declare ownership and use it to pay debts in emergencies.

The percentage of government debt held by foreign institutions is directly correlated with whether a country becomes richer or poorer over time. Let's consider a country as one entity. Its government, private businesses, insurance companies, public funds, banks and people, and their income are all actors within the same unit: a nation. Money flows from one actor to another, like moving from one pocket to another. When I buy a house, for example, a bank lends me money, which I use to pay the builder who built the house. Their salary is then used to buy food, which is taxed and brings revenue to the government, who spend it on healthcare that someone else will receive. Money is the counterpart and exchange for value creation, and it flows into the economy. The whole time, the money and value added remains within the country; it is just changing hands.

For example, if a country has a GDP of 100 billion dollars, this represents the size of its economy. If the country has an economic growth of 2%, this means that the previous year, the country's economy was worth around 98 billion dollars. Suppose the government's budget spending is 40% of the GDP. Of all public spending, 10% is spent servicing the debt. If the debt-to-GDP ratio is 100%, this means that 4% of GDP is spent paying interest to debt holders. If this country's debt is 25% held by foreigners, then 1% of the GDP would be used to pay foreign creditors and 3% to pay national creditors. When the economy grows by 2%, 1% of the value created goes to foreign countries, representing "lost" money that does not remain in the national economy, and 1% is added to the country's wealth, changing hands between different actors. This means that the country grows richer by 1% overall per year, rather than 2%, or that the average citizen gains 1% of purchasing power per year.

This is the nominal case, but many countries are moving into negative territory: Debt-to-GDP ratios are around 100%, interest rates on 10-year bonds are around 3.5% to 5%, and while 20% to 60% of debt in most advanced countries is held by foreigners, about 1% to 2.5% of the total economy goes abroad each year in interest payments (once all debt is rolled over at the current interest rate). With official GDP growth in Europe at around 0.8% over the last five years, Europe is actually getting slightly poorer every year as the outflow of wealth is greater than the inflow. This calculation is obviously simplified and not an exact science, nor entirely correct, as the reality is far more complex, but the principle remains absolutely true. With rising budget deficits, increased borrowing and interest rates, and slowing GDP growth, some countries are starting to see more wealth leaving the country to service debt to foreign creditors than is being created within it. This is effectively draining the country of its wealth and slowly lowering the living standards of each citizen on average, while entering a vicious circle where ever less wealth is created to service ever more debt going abroad. This trend will undoubtedly accelerate in the coming decades due to an ageing population, a shrinking workforce, and debt rollovers in the next five years to new high interest rates.

A high debt-to-GDP ratio is more manageable if a country holds debt from other countries. For example, if a country's national debt of 2 trillion dollars is held by foreign creditors, but it holds 10 trillion dollars of other countries' debt, the interest payments received on the latter will more than compensate for the former. This ratio is called the Net International Investment Position (NIIP) and is measured by the total amount of foreign debt held by a country compared to the amount of its national debt held by foreigners. Figure 4R below shows the NIIP level of each country as of 2016. On figure 4H below, the top 5 and bottom 5 countries in absolute and relative terms as of 2020.

Figure 4G: NIIP level per country as of 2016

Figure 4H: Top 5 and bottom 5 countries in terms of NIIP level as of 2020

Figures 4G and 4H above show countries with a vastly positive net international investment position (NIIP) in dark blue. These are traditional exporting countries such as Norway, Japan, Saudi Arabia, China, Russia, Germany and Canada. These countries have been exporting goods for decades, converting foreign currency into foreign treasury bonds and amassing interest rates on them. Countries with a large NIIP deficit in red are at high risk in the future, such as Portugal, Spain and Greece, which are mostly importing countries with deficits. Iceland was in the dark red category due to its financial bankruptcy in the wake of the 2008 financial crisis, when foreign investment was required to rescue the country, but is now back to positive 50% as of 2024. Turkey is also in trouble due to its recession from 2014 to 2020 and high inflation since 2020. Ireland is a special case because it has the lowest corporate tax rate in Europe, attracting tech headquarters of international companies and thus generating a substantial budget surplus through corporate tax revenue from multinationals.

In summary, while Japan has the highest debt-to-GDP ratio, which seems staggering, it can still sustain a functioning economy and finance its government budget thanks to its high positive NIIP level, which is the highest by far, and its accumulation of foreign exchange money from investment abroad. Countries at risk in the future are those with a high level of debt and a large negative NIIP, such as Spain, Portugal and Greece, which will have to pay a lot of money to service their debt. This money will mostly leave the country, making its inhabitants poorer over time.

Corporate debt and household debt

In addition to government debt, there is corporate or private sector debt, as well as personal consumer debt.

Corporate debt is not in itself a problem: Capital needs to be invested when a business is set up or wants to grow, and usually the operator does not have all the necessary funds and needs an external lender willing to take the risk without a guarantee of future returns. This business debt is not an issue because only the people involved in the business are affected if the business goes bankrupt: the lender, the operator and the employees, who would lose their jobs but not their personal money.

On the other hand, household consumer debt in the US and Canada is becoming very worrying because it is a social issue that affects everyone on the continent, much more so than in Europe, which does not have this credit culture. People in North America buy much more than they can afford, bigger cars and houses, simply because cheap and easy consumer credit is available. "Buy now, pay later" is now everywhere, from consumer goods to services. Instead of saving every month for 5 years to buy a car for $20,000, people buy it immediately on credit with no down payment, seemingly affordable, but 5 years later the car has actually cost $25,000 when you add in the high interest rates on consumer credit, hovering around 15% to 20%. In essence, you are sacrificing your future purchasing power for more current purchasing power. The same applies to smaller purchases, such as TVs or smartphones. Consumers can lose track of how much debt they have accumulated over the coming months, which can lead to them defaulting on their debt repayments and putting their personal finances at risk.

Over time, the American consumer is financially suffocated by all those monthly repayments from past purchases. It's gotten to the point where most households are really struggling to get through the month on budget, don't even have a month's savings in their bank account, and are constantly buying things just because they don't have to pay a downpayment up front. This puts people under stress, leading to mental health problems, but it also forces people to work more and earn more, pushing the limits of over-consumption even further.

Figure 5A below shows that, before 1980, total US debt (including household, corporate and government debt) remained relatively stable in relation to the size of the economy. However, since around 1980, total debt has increased much more rapidly than the economy. The current gap is three times bigger, and the same trend is observed across all industrialised countries. The larger the gap, the greater the implication for future demand and consumption, including the associated environmental degradation. While debt is fuelling economic growth, rising debt also poses a significant risk of being unable to service it, particularly as the working population and consumer base decline. This risk is further compounded by the potential unavailability of energy or materials due to geological shortages, depletion, or geopolitical conflict.

Figure 5A: Total US debt against US GDP

Figure 5B below shows the split of household debt, corporate debt and government debt in the USA.

Figure 5B: Government debt, household debt and business debt in USA

As shown in figure 5B above, the sum of government, corporate and household debt has reached about 300% of US GDP. In other words, only a quarter of the current economy is based on real capital savings. 75% of the economy is credit money for which there is no insurance savings or back-up capital. The US is living on steroid perfusion, and if the dose is not increased over time, the patient (US society) will not feel any effect and will need more drugs every day to get a kick. You know where this is going to end.

As shown in Figure 5C below, there is a large disparity among countries with the most total debt, when accounting for federal, corporate and household debt.

Figure 5C: Countries with the highest total debt burden

On one hand, for some highly indebted countries, the total debt-to-GDP ratio is not a concern or imminent risk: Hong Kong and Singapore are extremely wealthy financial centres that attract capital and wealth, Japan holds a significant amount of foreign assets and foreign currency, China has an industrial dominance and a massive trade surplus with foreign assets and currencies. On the other hand, some other countries with high debt level, like France, are in a precarious position due to their dwindling active population, lack of foreign assets, diminishing industry and exports, and high yearly budget deficit.

Why the level of debt is growing so fast

Global debt refers to the total amount of money owed by all sectors, including governments, businesses, and households worldwide. As Figure 5D below shows, global debt has grown at vastly different rates since 1996. In advanced economies, excluding emerging markets, it increased from approximately 20 trillion dollars to 224 trillion dollars between 1996 and 2023. Over the past 10 years alone, the government debt of advanced economies has grown by 60% to reach $96 trillion, while corporate debt has grown by 55% to reach $93 trillion and household debt by 43% to reach $59 trillion.

Figure 5D: Evolution of the global debt in advanced economies

If we account for all countries worldwide, total global debt at the end of 2024 was $319 trillion, compared to a global GDP of $112 trillion in 2024. This represents an 8% annual growth rate, by definition in line with the total M2 money supply growth rate. This means that there are three dollars of debt for each dollar of economic output. This assumes future economic growth and it also assumes that interest will be demanded on future revenue.

US government debt stands at around $37 trillion, with household and corporate debt at around $20 trillion each. That's a total of about $75 trillion of debt in the US economy, while the total amount of dollars in circulation, the M2 money supply, is now $21 trillion, and the country's economic output, GDP, is $28 trillion. So how is it possible that we have borrowed 3.5 times more money than is actually in the economy, or 3 times more than the productive output of the country?

The answer is hyper-leveraging, or multiple collateral lending. Essentially, the same money is used multiple times for multiple loans, increasing the total debt by a factor of 3 to 5 compared to the original amount of money.

Here is an example to understand the mechanism:

Imagine you have $1000 cash that you deposit in the bank. The bank uses this money to make a safe profit: The bank uses $900 to buy a Treasury bond from the government to earn 4% interest on it, and keeps $100 in cash in case you ask for a cash withdrawal. This $900 in cash is given to the government in exchange for a government bond, or debt owned by the bank. The government will then use this money for public spending, let's say for pensions or social entitlements. A 70 year old pensioner will receive this $900 government grant and deposit it in his bank. That bank will then use that $900 to lend $800 of it to someone else in the form of a mortgage to a person who wants to buy a house. The bank provides that $800 in cash plus another government loan of $8000 to provide the new home buyer with $8800. Essentially, money is used for a loan, and the loan is used for another loan, and this mechanism can be done several times. That's how you end up with far more debt than the real economy can produce, and thus a total debt level of government, households and corporations that is growing 3 to 5 times faster than the actual money supply or GDP in the economy.

The risk of this over-leveraged system is twofold: if the real economy slows down, it sets off a chain of events where one loan defaults, which makes the other loan default, etc... risking a global financial crisis like in 2008. The other risk is that there is so much debt and money in the system that, if nothing breaks down, it can only lead to this money flowing into assets such as house prices, gold, bitcoin, art, equities, and eventually food, rent, and prices of goods and services, and inflation overall. There are really 2 long term paths for this runaway debt upheaval: a massive default and global financial crisis, or high and sustained inflation. Neither of these scenarios is a pleasant outcome.

The M2 money supply is an indicator of the amount of money in an economy. It can be measured at a currency level — for example, in the USA with the US dollar, in Europe with the euro and in China with the yuan — or globally by totalling the amount of currency in circulation. It is interesting to see the percentage change in the total money supply (M2) year on year, as this indicates how much new money has been printed by private and central banks and injected into the economy.

Over the last 30 years, about 7% more money has been added to the global economy each year, and this figure will need to increase to ensure growth, service debt and cover the higher energetic cost of resource extraction. This 7% ends up somewhere in the economy. If it ends up in the hands of banks, billionaires or fund managers, it is invested in assets such as real estate, company ownership or stocks, private equity, art, gold and bitcoin. This raises the price of assets, which is why the rich keep getting richer and the gap between the top 3% wealthiest people and the bottom 60% poorest continues to widen. If the additional 7% of money ends up in regular people's bank accounts, it mostly goes into goods and services, creating inflation.

In the best-case scenario, 2% flows to goods and services as inflation and 5% to assets valuation. From 1995 to 2007, money supply creation was low, so neither asset prices nor inflation increased dramatically. From 2008 until 2020, in the aftermath of the financial crisis, there was a lot of new money creation to stabilise the banking system. The added money mostly went into assets. That's why we never experienced any inflation in most industrialised countries, but stock and house prices skyrocketed during that period. We actually experienced asset inflation. From 2020 to 2024, a huge amount of new money was printed and went towards both assets and goods and services, as people were forced to stay at home during the COVID pandemic and were supported by government benefits. This resulted in high inflation, as well as rising stock, gold and bitcoin prices. Real estate remained flat due to high interest rates, which impact this asset class more than any other.

Figure 5E below shows that the world money supply (in blue) fluctuates between 0% and 15% of the new money injected into the world economy each year. While we do not see a perfect correlation, periods of growth in the money supply tend to be reflected in asset prices, typically company stocks (in red), about a year later. Periods of reducing money supply tend to reduce business values overall. There is a slight delay because it takes six to twelve months for the money to be created and injected into pension funds, insurance companies, hedge funds and private banks before it flows into assets such as businesses.

Figure 5E: World M2 money supply agains world stock index, last 30 years

That's the harsh reality: The money supply will continue to grow and has to flow somewhere, either into assets or into goods and services. This will lead to either growing social inequality or consumer inflation picking up. In both cases, it will generate social protest. This is unavoidable and will accelerate in the coming decades as the money supply must grow faster to cover the needs of an ageing population, geopolitical turmoil, higher interest rates and servicing past debt. Debt is the engine of the economy and the welfare system, and it must grow disproportionately faster than the growth of physical goods and services. Debt will not slow down any time soon; rather, it will keep accelerating until most of it comes from central bank money creation. This will lead to general high inflation and the collapse of the financial system and our prosperity.

The debt trap

Have a look at this 15 minute video which summarises in simple terms the debt spiral that every industrialised country is in. What is true for the US is true for most industrialised countries.

The US national debt amounts to 37 trillion Dollars by mid-2025, which is about 100,000 US$ per person. That's a huge burden for every newborn in the country. But the alarming statistic is not the absolute figure, but the trend: from 10 trillion in 2000 to 34 trillion in 2024, and growing exponentially. The amount of US debt added is growing at an incredible pace, at about 100,000 US$ every second! The most frightening thing about this situation is that the US government literally can't pay back the debt, and the congressional budget scorekeepers predict that the situation will be worse in 10 years than it is today, not better. So what does this lead to, and is there some sneaky cheat code that the US can use to get around the debt problem?

Just like you and me, a country goes into debt when it wants to buy something it can't really afford. Like people, a country has income and it has expenses and if it wants to spend more money than it actually brings in, it can go into debt to raise some more money, just like us when we take out a mortgage to buy a house. That debt has to be repaid and if you get into a situation where the country can't pay back its debt, the country defaults, just like a homeowner who can't pay back their mortgage. So how does this system work?

The government's budget is a balance of revenue, mainly taxes from consumption, business and individuels income, and expenditure, such as health care, social security, public infrastructure, interest on debt, defence, education, and so on. See figure 6A below.

Figure 6A: Typical US government budget in 2024

When the government has more spending than revenue, it is called a budget deficit. The government needs some more money, so it sells government treasury bonds to investors, who lend their money to the US Treasury, and the Treasury promises to pay it back plus interest at some point in the future. It's also worth noting that anyone can buy bonds: people, institutions, insurance companies, foreigners and foreign governments, but also the central bank itself, the US Federal Reserve, and this is the process the US uses to print money and inject it into the economy. The Federal Reserve will create money out of thin air and then buy government bonds to put that new money into the hands of the government and that's how a country gets into debt.

The main reason a country goes into debt is because it spends more than it earns and this is known as the budget deficit, so the worse the annual deficit, the more money the government has to borrow each year. If the government spends $4 trillion and only takes in $3 trillion, it has to sell $1 trillion worth of bonds to make up the difference. The last budget surplus in the US was in 2001, since then there has been a deficit every year, and the trend is for the deficit to grow every year, especially in 2008-2010 during the financial crisis and in 2020-2022 during the Covid crisis. The gap between spending and revenues is getting bigger and bigger every year, as shown on figure 6B below, and that means that in order to balance the books every year, the government has to raise more and more money, it has to sell more and more bonds, it has to go deeper and deeper into debt.

Figure 6B: USA fiscal budget deficit/surplus over the last 50 years

The US government does not want to pay this huge debt load, because in order to get back to a budget surplus and use it to pay down the debt, they either have to cut spending on social services and public infrastructure, or they have to raise revenues by raising taxes, and both of these options are very unpopular with the citizens and with the active government in place that is looking for popularity and re-election. So the only way out is more debt and more budget deficits. And the deficit is expected to keep growing from $2 trillion in 2024 to $2.8 trillion in 2034 because of an ageing population requiring more health care, increased military spending in this geopolitically unstable world, increased energy transition subsidies and industrial sovereignty subsidies, and also because the interest rate on the debt is rising every year and taking a bigger slice of the spending pie every year, especially with interest rates recently rising to 5% to fight inflation.

Figure 6C below shows how much interest the US government has paid on its debt since 1980. Figure 6D below illustrates the proportion of government budget spending accounted for by interest payments since 1970.

Figure 6C: Interest payments on US debt in absolute US dollars

Figure 6D: Interest payment on US debt as a % of budget spending

As you can see in Figures 6C and 6D above, in 2024 the interest payment to service the US debt has risen to over $1 trillion per year. It has doubled since 2020 as the interest rate rises from 2% to 5%. When a country's public debt exceeds 80% of GDP, the government simply cannot maintain high interest rates for long because the debt is so high that the interest payment becomes a huge part of the government budget. When the debt is over 100% of GDP, it means that the Central Bank really has no leverage or room to control inflation or money spending in the long run, it can only create more debt to pay the interest on the previous debt, or it has to set the interest rate at around zero forever, as Japan has done for the last 20 years.

As of 2024, 14% of the american budget is spent on servicing the debt (or paying interest rate), tendency up, as it was 7% in 2021. See figures 6E and 6F below.

Figure 6E: USA budget spending in 2023

Figure 6F: USA 2024 budget spending compared to revenues

In Europe, the share of interest payments on debt in total expenditure varies from 1.2% in Germany and 3% in France to 7% in the United Kingdom and Italy. Overall, on average in Europe, around 16% of total expenditure is spent on health care and around 40% on social protection such as pensions, unemployment, family support, solidarity, etc., as shown in figure 6G below. In France, 20% is spent on health care, 25% on pensions and a further 10% on other social protection.

Figure 6G: EU budget spending in 2021

More debt and more interest rate payment each year means that the share of total budget spending going on debt interest payments will continue to grow year after year, taking us to a place where a large part of our budget is allocated just to paying the interest on the debt (not the debt itself).

Figure 6H below shows the share of the government budget spent on debt service (interest payments only) in 2021-2023 in red and the expected share in 2024-2026 in blue.

Figure 6H: Debt servicing share among total budget in different countries

Take the US in 2020, with a debt-to-GDP ratio of 110% and an interest rate of 2%, this means that 2.2% of the GDP that year was spent on servicing the debt or paying interest on the debt, leaving a large chunk for education, health care, public services, infrastructure, etc.

After the post-covid inflationary period, the FED raised interest rates to 5% to slow down credit and money creation to counter inflation. Thus, in 2024, 5% of a 120% debt-to-GDP ratio meant that the government would have to pay about 6% of the annual GDP just to service the debt, about triple the amount just 4 years earlier.

Going forward to 2030, as debt and inflation grow, to attract more new lenders to buy new bonds, investors will demand a higher interest rate, a higher return on investment because of increased risk, so interest rates will go up to around 3% to 6%, and debt to GDP is expected to be around 150%. Add it all up, and so in 2030, 15% to 20% of budget spending will go to debt interest repayments. compared to just 7% in 2019, that's a huge difference, it's 3 times more spending on debt interest in 1 decade, leaving less money to spend on health, infrastructure, etc.... And when you factor in an ageing population and the increasing frequency and impact of natural disasters, we will need to spend more on health care, pensions and infrastructure in 2030 than we do today, exacerbating the need for more borrowing and more debt... This is the dreaded debt trap or debt spiral, where debt leads to more debt, an unsustainable hamster wheel scenario that grows exponentially until severe financial austerity and/or hyperinflation. Severe economic pain is the only way out in the long run.

The vicious circle of austerity measures

Austerity is not viable for any government in power. GDP growth has fallen to around 1-2% in most advanced economies, which is not enough to cover the next round of deficit spending. Government deficits will continue to grow in the future because of a shrinking working population and a large retired population. GDP growth of 4% or more is no longer possible with a shrinking working population and growing retired population. So the most likely scenario is that governments will force individuals and private entities to buy bonds. Personal savings, insurance companies, we will all be forced to buy bonds and indirectly finance the deficit in a dictatorial authoritarian decision.

From 1970 until 2010, the economy in most industrialised countries grew by 3% to 5%, mostly due to an increase in the working-age population resulting from the baby boom of the 1945-1965 era. When the economy is growing strongly, the government can run a budget deficit and go into debt, safe in the assumption that tax revenue will grow in subsequent years to pay off the debt. However, from the 2020s onwards, the working-age population is starting to shrink, as will the natural economy (freed from public investment and statistical manipulation) and tax revenue levels, year after year. The government should actually have a budget surplus when the number of workers decreases. Think about it this way: if you earn $5,000 a month, you can afford to pay $2,000 rent per month, but when your income falls to $4,000 or $3,000, you have to move to a smaller, cheaper place because you can only afford $1,500 or $1,000 rent. This is what should happen. However, because welfare spending on pensions and healthcare is rising due to an ageing population and spending cuts are unpopular, the government is spending as if the economy were booming. We are living beyond our means, spending public money that we don't have, and doing so by taking on debt that we won't be able to repay nor service in the future. Hence, the budget deficit and debt levels are growing fast and we are heading for an inevitable downfall involving high inflation, massive protests and riots, currency debasement, and a rapid loss of living standards.

Is public debt actually a problem ?

One could argue that Japan has had a huge public debt for decades, currently the highest in the world at 270% of GDP. Yet its economy and standard of living have remained stable for the past 30 years. So why is rising debt a problem when Japan and the Japanese people have been able to live very decently for 30 years despite having a high level of debt? Let's examine the specific Japanese situation and draw parallels with South Korea in terms of the impact of fertility rates on its economy and debt.

Japan had a booming economy from 1960 until the 1990s, even surpassing the USA in terms of total stock market capitalisation in the early 1990s. This was partly due to the fact that, since 1958, Japan had been the first industrialised country with fertility rates below the replacement level of 2. Without children to care for, adults were more productive workers and consumers, leading to an economic boom. However, since the 1990s, GDP per capita has stagnated until 2025, as shown in Figure 7A below. Meanwhile, from 1990 to 2020, South Korea's economy boomed, which also marks the period when South Korean adults drastically lowered their fertility rate to an unprecedented level of 0.7 today. South Korea is essentially following in Japan's footsteps in terms of economic growth and low fertility rates, with a time lag of only 30 years.

Figure 7A: GDP per capita in South Korea and Japan

One reason behind Japan's economic explosion from the 1960s to the 1990s was the rapid increase in the working population. Similarly, the major reason for Japan's GDP per capita not growing from the 1990s until 2025 is the decline in the working population. Gains in productivity could only partially compensate for the decline in the number of workers, meaning Japanese GDP remained relatively stable for 30 years. As shown in Figure 7B below, Japan's child population peaked in 1955, making it the first country in the world to do so. Its peak working-age population was around 1990, which coincided with the end of Japan's economic boom and the start of stagnation in its GDP growth, mainly due to a declining working-age population. Japan's total population has been declining since around 2010, but the ratio of retirees to workers (the old-age dependency ratio) continues to rise, putting a strain on the country's social welfare system, public finances, and debt levels.

Figure 7B: Japanese population split by age group

Similar to Japan, but with a delay of 30 years, South Korea has seen its working population explode from 1990 to 2020. This was a major factor in its GDP per capita growth, but it is now facing the same issue as Japan will over the next 30 years: A sharp decline in its working population. See figure 7C below.

Figure 7C: Evolution of the age groups in South Korea and Japan

Now, let's take a look at the Japanese public debt in figure 7D below. From 1960 until the 1990s and during Japan's economic boom, public debt remained relatively under control at 40–70% of GDP. However, as the working population declined and GDP growth slowed, the system (comprising private banks, the central bank of Japan and politicians) had to inject more money into the economy to keep it afloat and fund the rising costs of social welfare for an ageing population. Japan's public debt ballooned from 65% of GDP in 1991 to 240% in 2014. An incredible increase in just 23 years.

Figure 7D: Government debt to GDP ratio in Japan

I can safely predict that, similar to Japan between 1990 and 2020, GDP per capita in South Korea will stagnate at best over the next 30 years and that public debt levels will rise from 50% today to between 200% and 250% over the next three decades. I would bet my life on it!

While Japan's debt level is extremely high, it is somehow not a burden for the government or the standard of living of Japanese people. Why?

There are 3 main reasons for this:

Firstly, 91% of the debt is held internally by Japanese or Japanese institutions. Only 9% of public debt is hold by foreign creditors. This means that servicing the debt is simply a social transfer within the Japanese economy rather than money being transferred from Japan to foreigners, meaning that the added value of the Japanese economy is not given away to foreigners. Even when Japan's debt-to-GDP ratio reaches 250% in 2024, only 23% of GDP is a foreign hold debt, which is on par with the USA and Europe (where about 20% is held by foreigners with roughly a 100% debt-to-GDP ratio).

The other reason is that Japan has been a major exporter for 60 years, like Germany, China and Norway. These exports over the last five decades, especially from the 1970s to the 1990s, have led Japan to accumulate foreign currencies and assets in other countries (mainly foreign bonds). Today, Japan has the strongest net international investment position, with $3.5 trillion in overseas assets. Japan earns interest on these foreign assets each year, generating wealth in foreign currencies. The dividends from these foreign assets are enough to cover the national debt and some of the population's imports of goods and services. Japan's gross debt may be at 250%, but if we subtract the substantial debt that Japan owes to other countries, which is yielding interest, then Japan's net debt is at around 150%. This puts it on a par with countries such as Italy and Greece, and just above the USA and France.

This scenario of holding a lot of foreign assets is very different to that of countries such as Spain, Portugal, France and the USA, which have been net importers of goods for decades and have had a large negative trade balance for decades. These countries are clearly net international investment debtors today, which means that each year, part of the Spanish, French, Portuguese and American GDP is sent to foreigners in the form of interest payments.

In addition, Japan is a socially stable country with a high level of mutual respect and social cohesion due to almost zero immigration over the years. Having visited Japan, I can say that the dedication of the Japanese people to their families, employers and tourists is unbelievable. The Japanese live to serve others and the system; they seem to have no ego or individual aspirations. This is also a stark contrast to Western culture, which is more individualistic, with each person trying to get the most out of the system for themselves to the detriment of the whole.

Those 3 reasons are why Japan's fairly good economic situation will not be replicated in Europe or other advanced nations with high debt levels and low fertility rates. Japan's situation is not replicable in most other industrialised countries.

While Japan has held its own so far, the worst is yet to come in the coming decades because the population of retirees will continue to grow while the working population continues to decline. The value of the yen, Japan's currency, is also falling compared to other currencies due to this debt issue. Whatever financial tricks or complexities Japanese leaders employ, whether they devalue the yen or not, or whatever interest rates they set, one thing is certain: Japanese pensioners will continue to lose purchasing power and face restricted access to social assistance. Healthcare and labour support will become scarce.

Since 2020, we have finally seen Japanese inflation pick up after so much debt and liquidity was injected into the social system, as shown in figure 7E below.

Figure 7E: Japanese inflation the last 10 years

Consequently, the long-term interest rate at which the government must service its debt-to-GDP ratio of 260% is also rising rapidly, as demonstrated by Figure 7F below. This suggests that investors have lost trust in Japan's ability to service its debt or in the prospect of low inflation in the future. Servicing Japan's huge debt was almost interest-free on 10-year bonds between 2016 and 2020, and at an interest rate of around 0.5% on long-term 30-year bonds. Now, in 2025, the 30-year bond costs an interest rate of 3%. This represents a sixfold increase in just five years, meaning that servicing government debt is set to cost six times more in the coming years than during the 2016–2020 period.

Figure 7F: Interest rate payment on the national japanese debt

Japan's huge debt burden is now becoming really problematic. This is accelerating the debt spiral because the Japanese government will have no choice but to borrow and print more money to pay off past debts, as tax revenues from the shrinking economy are falling and investors are losing trust in Japan's long-term ability. This unsustainable burden stems from a shrinking economy with rising social welfare costs and a shrinking working population. The sole root cause is the lack of children since the 1960s. What Japan is about to face in the coming years, all other industrialised countries will face in the coming decades.

Now, let's return to all industrialised countries. A high level of debt, combined with a stagnant economy (mostly due to a declining working population), means that servicing the debt will be a huge burden that taxation will not be able to cover.

Interest payments (debt servicing) in 2024 has consumed the largest share of rich nations' economic output since at least 2007, outstripping their spending on defence and housing, according to figures from the OECD.

Debt service costs as a percentage of GDP for the 38 OECD countries will climb to an average of 3.3 per cent in 2024, up sharply from 2.4 per cent in 2021. By contrast, the World Bank estimates that the same group spent 2.4 per cent of GDP on their militaries in 2023. Interest costs in 2024 was 4.7% of GDP in the US, 4.1% in Italy, 2.9% in the UK, 2.1% in France, 1.3% in Japan and 1% in Germany. Countries' debt interest payments vary because of differences in their debt-to-GDP ratios and because of the national interest rate, which is based on the country's expected long-term growth and inflation.

Borrowing costs have risen in recent years as bond investors brace for persistent inflation in major economies and rising bond issuance as many governments increase spending on defence, pandemic recovery, welfare and other fiscal stimulus measures. In OECD countries, half of the old bonds issued before 2021 at low interest rates are expected to mature before 2027 and need to be reissued (rolled over) at higher current interest rates, driving up debt service costs in the coming years and decade. As can be seen in Figure 27 below, the cost of servicing debt has multiplied by four between 2020 and 2025. The accumulated debt of the past is now five times more expensive than in 2019/2020, meaning a larger portion of the government budget will have to be allocated to servicing the debt. Note that servicing the debt involves paying the interest rates, not paying off the debt itself. The debt itself remains, and new debt is being incurred. Governments only pay the interest on the debt.

As can be seen in Figure 7G below, the cost of borrowing for the US government has been declining since 1980. At that time, the debt-to-GDP ratio was low at 30%. Because borrowing costs (or long-term interest rates) kept falling, the government could borrow more and accumulate more debt, as the interest payments on the total debt decreased over time.

Figure 7G: Government borrowing interest rate in USA since 1940

However, as can be seen in figure 7H below, since 2020, we have entered a new cycle of rising interest rates. As inflation is expected to remain high in the coming years, lenders are demanding higher rates, making borrowing more expensive for the government. This means that the government's accumulated debt of 120% of GDP will now cost four times more to refinance than in 2020. Servicing the debt is becoming an enormous burden for governments.

Figure 7H: Government borrowing interest rate in USA since 2020

In theory, borrowing should be done to increase economic growth so that governments can eventually stabilise and actually reduce the debt to GDP ratio, but the reality is that borrowing is now being done mainly for welfare and social systems, as well as military spending and servicing the debt, none of which are investments with returns to the economy in the future, and also all those spending are expected to increase in the coming decades with the ageing population, shrinking workforce and the context of world geopolitical instability.

Interest payments on the debt will consume an increasing share of government budgets in the coming years. Faced with unpopular and difficult decisions to reduce military spending and/or cut welfare spending, governments will instead prefer to issue new debt just to service the interest on the existing debt. This will plunge most of the industrialised world into a full-blown debt spiral, a trend that actually started in the aftermath of the 2008 financial crisis. There is no way out in the long term other than social collapse, poverty through loss of purchasing power, erosion of the quality of public services, especially in the context of a declining labour force that is incapable of generating economic growth.

Government borrowing is not like private borrowing. If you, as an individual want to buy a $20,000 car with a loan, you go to a bank, you get your loan and you pay $1050 a month for 20 months. The $1000 per month is the repayment of the credit and $50 is a fee, the interest rate, paid to the banking institution to service your debt. After 20 months, you own the car 100%, you have no debt and you have no monthly payment anymore.

When a government borrows money, it is different: Governments issue bonds and either private investors or the central bank buy the bond. Let's say it's $100 for a 10-year bond. Each year the government will only pay $4 in interest to the lender to service the debt. But after 10 years, the government has spent a total of 40$, but still owes the lender the original 100$, The original debt is never repaid. What the government does is it issues a new bond of 100$, finds a new lender, and uses that 100$ to pay the original lender of 10 years ago. The debt is never repaid, it just accumulates with previous debts. The debt remains over time, it just finds a new owner or lender, and we called it "rolled over". That's the big difference with private landing, where the original capital is repaid over time. And that's why every budget deficit that requires new debt is an additional debt to all the debts of the past. Debt is never repaid, it accumulates. Only economic growth or inflation can reduce public debt.

Rising government debt is not a problem in itself because governments can always print money and cannot default on their own currency. We have had an incredible rise in debt over the last 40 years and society and the economy is still doing fine. Having huge debts and regular budget deficits is not a problem in itself.

The problem is that if the economy doesn't grow at the pace of the added debt, it doesn't provide sufficient tax revenue to service the interest on the debt. If the structural deficit grows over the years, you have two options: grow the economy so that the additional GDP and tax revenues cover the cost of the new debt, or add more debt to service the interest on the previous debt. As the working population in most industrialised countries begins to decline, and it will decline significantly over the next 3 decades because the demographics are set in stone as the last 20 years of births are a fixed and known fact, we will have a declining working population and stagnant or declining economic output. We won't be able to continue our 2% GDP growth for the next 20 years, that's for sure, given the demographics. So the only remaining solution will be more budget deficits and more debt to pay the previous debt, combined with less public spending on social welfare, pensions and health. And that will bring high inflation, loss of purchasing power. We will go deeper into the debt trap, the debt will spiral out of control, when every year you need more debt to pay the interest on the old debt and to compensate for lower tax revenues due to economic degrowth resulting from a shrinking active population and a growing inactive population.

Public services based on government spending, such as pensions, health care and infrastructure, are all funded by taxes collected from the taxpayer through income tax, corporate taxes and VAT on goods and services from consumers. The ageing of the population will have disastrous consequences for the prosperity of our financial and social systems. If the pool of taxpayers is reduced because of a shrinking workforce and fewer consumers as the population ages, but the pool of public spending increases because of a growing retired population requiring health care and social support, it will lead to more debt, unsustainable debt. If $5000 is collected from taxpayers and you have 5 pensioners to support, public spending has $1000 to spend per pensioner. But if the economy shrinks to $4000 because of a declining population, but the number of pensioners grows to 8, you now have only $500 to spend on each pensioner. Either you go into health care poverty and low pensions at $500, or you go into money printing via unsustainable debt to cover the missing $4000 to reach $1000 per pensioneer, the latter only postponing the inevitable crash of the whole financial system and collapse of the whole society.

As shown in Figure 7I below, the ratio of workers to retirees in Europe has fallen from 7:1 in 1960s until 1990s, down to between 3:1 and 4:1 in 2025 depending on the country, and is expected to reach 2:1 by 2050. This is a truly unsustainable situation from the perspective of labour, elderly care, public pensions, the economy and finance.

Figure 7I: Europe old age dependency ratio evolution

The decline in fertility rates threatens to create a deep economic malaise. Fewer babies and more elderly people will mean a smaller proportion of people of working age, reducing economic growth and tax revenues at the same time as the costs associated with ageing societies, such as state pensions and health care, rise. For example, in 1995, 10 workers in East Asia supported one retired person; by 2050, the ratio is expected to be 1.5 to 1. In Europe, too, the ratio is expected to rise from 6 people under the age of 60 to 1 person over 60 in 1950 to 1.7 to 1 in 2040.

Without sufficient policy action, analysts at S&P Global estimated in 2023 that budget deficits would rise from a global average of 2.4 per cent of GDP today to 9.1 per cent a year by 2060. Global net government debt as a percentage of GDP would nearly triple. The economic consequences will be dire.

As Milton Friedman said, every government budget is actually balanced, but if it is not balanced from an accountant's perspective, like in most major economies, then the people pay the deficit in the form of inflation and debt. Inflation is an immediate tax; the poorer you are, the more you feel it. Debt is a small tax that adds up to the one of the previous years, and it is something that we will have to pay off over several generations in the decades to come.

US dollar as world reserve currency

After the Second World War, the US dollar became the world's reserve currency and was backed by gold, meaning that a dollar was always convertible into gold. With the booming post-war reconstruction, the economy and the world's money supply grew faster than the supply of gold. The US dollar was backed by gold until 1971, when president Nixon and the US realised that gold was being sold out of the country due to fast global economic growth outpacing gold mining. Although the US dollar lost its convertability into gold, the US dollar is still the world's reserve currency today, allowing the US to take on much more debt without suffering the adverse consequences that other nations would suffer because other countries need dollars for their international trade. But with a multipolar deglobalising world, more tensions and volatility, this premium status is weakening. If the dollar's status is lost, Americans are particularly vulnerable to a massive crisis in which the whole standard of living will plummet.

Figure 8A: Share of the foreign reserve currencies

As shown in figure 8A above, more than 50% of the foreign reserve currency is the US dollar. By winning the Second World War and having no destruction and no need to rebuild on its soil, the US was able to leverage its power into the greatest financial masterpiece of the 20th century: Forcing the world to trade oil in US dollars and establishing the US dollar as the world's reserve currency. The consequences? It means, for example, that when Saudi Arabia sells oil to a European country, because oil is traded in US dollars, the European country pays in US dollars. Saudi Arabia has billions of US$, a small part of which is used to import goods and services from the US into Saudi Arabia, but the vast majority of the US$ is invested in US Treasury bonds, which are used to finance the US public deficit and support the high standards of living of americans. That's a privilege that no other country has. When you think about it, a trade transaction between Saudi Arabia and Europe that has nothing to do with the US or the US dollar results in US public money being used to finance US government spending, that's an incredible feature!

The US dollar is the primary cross-border funding currency. When two countries outside of the USA exchange goods or services, the transaction is usually denominated in US dollars, unless it is in one of the two countries' currencies. The dollar is also involved in around 90% of foreign currency exchanges, meaning that foreign entities hold significant amounts of dollar assets, typically US Treasuries. The US dollar is unique in that entities around the world hold it for long periods of time. While most currencies are primarily used by the country that issues them, the dollar is used globally. The whole world uses dollars for international contracts, reserve assets, cross-border funding and currency exchange. As a result, it pushes open the US trade deficit and the US government deficit, and then holds it open. Other countries do not have this privilege.

Over the past decade, the US has experienced 82% cumulative growth in its broad money supply. Meanwhile, China's broad money supply grew by 145%. Brazil's figure was 131%. India's growth was 183%. Egypt experienced an astonishing 638% growth in its broad money supply during that same period. The US is debasing its currency at a slower rate than other countries because it has the dollar, the world's reserve currency. Many foreign entities need dollars in order to purchase assets, execute international deals or service foreign debt. The US government does not need to print new money when selling a bond because, more often than not, they find an international buyer with excess US dollars from prior international trade. This is the USA's privilege. Although foreign demand for the dollar may weaken over time, the US dollar will remain a very attractive currency.

Because the US dollar has been the international reserve currency since 1945, other countries that trade with each other often pay in US dollars and need to secure US dollars as a reserve currency. What they do with those US dollars is buy US bonds to earn interest on them until they one day use them for future payments. This means that there are many buyers of US bonds around the world, and it has given the US a tendency or addiction to run more deficits and borrow money because the US government is in the privileged position of almost always finding a lender. This is a privilege that many smaller economies with their own currency such as Brazil, South Africa, Japan etc... cannot duplicate and cannot enjoy like the US. Issuing debt in other smaller economies often means not finding a lender, and so the lender of last resort is the central bank, which prints money for the government in exchange for the government bond, whereas the US can much more easily find a private lender to avoid printing new money. But the American privilege of the US dollar has brought bad habits of reliance on debt, which has led the US government to massive public spending and the US now has a huge deficit every year, about 7% of GDP in 2024.

Figure 8B: Biggest foreign holders of US debt

As you can see from Figure 8B above, many international goods are exchanged around the world in US dollars. This means that foreign companies and countries end up holding US dollars, which they then invest in US bonds. China and Japan were major buyers in the 2000s and 2010s. Since the 2020s, with a growing budget deficit and rising interest rates making US bonds more attractive, more US debt has been issued and more countries have been buying it. The only exception is China, which, for geopolitical reasons, has started to reduce the proportion of US dollars in its currency reserves and has begun to use gold for international settlements. It also intends to conduct more commerce with countries other than the USA.

US dollar inflation acts as a global tax on the world: all countries that conduct international business and trade in USD end up buying US bonds and financing the US welfare state and American high living standards.

Outside of USA and the US dollar, other currencies do not have the privilege of being a reserve currency, which means that there are fewer investors and lenders in government bonds in other countries than in the US, making it harder to find a buyer for the new debt. but they are all still printing money above the country's GDP growth rate to pay for public services and stimulate their economies. This can only continue as long as lenders have confidence in the country's stability and are rewarded with a positive real interest rate, above inflation + GDP growth. If inflation persists, interest rates will rise, making borrowing more expensive and exacerbating debt growth in a vicious circle known as the debt trap. If growth comes to a halt due to war, a pandemic or dwindling energy sources, confidence in a country may fall and lenders will refrain from lending unless they get a really high interest rate in return.

Once you get past a certain debt-to-GDP ratio of 80%, if inflation rates stay above 5% for years, there is no turning back unless you grow your economy tremendously to reduce the ratio, which will not happen in the long term due to the lack of energy resources to fuel world growth.

When debt rises faster than economic growth

For the past 75 years, we have lived through an extraordinary anomaly: an era fuelled by cheap, concentrated fossil energy, exponential credit expansion and an unusual period of geopolitical stability. Every mainstream forecast about the internet, AI, green energy or perpetual GDP growth assumes that this moment is the norm. However, the foundations of this illusion are beginning to crumble: Cheap, abundant oil and gas are being replaced by shale oil and shale gas, which are more difficult to extract and have a low EROI, and are being converted into LNG. Geopolitical tensions are rising, with many countries being forced to choose sides between the USA and China. Overall, the working population is starting to decline in the industrial world, which will reduce total output and the consumer base. Then there is the growing social welfare allowance due to the ageing population.

From the end of WWII until 1971, all currencies were indexed to the US dollar as the foreign exchange reserve currency, and the US dollar was backed by gold. However, gold could not be produced quickly enough to cover the booming economic growth led by fossil fuels and the working baby boomers. All countries were demanding gold, and the US saw its gold reserves decline rapidly. The gold standard was no longer suitable for a booming economy, and in 1971 US President Nixon ended the convertibility of the US dollar into gold. This marked the beginning of 'fiat money', which is not backed by anything other than the trust of its users. This also enabled all governments and central banks to print money and go into debt in the 1980s, as fiat money was no longer backed by anything. Initially, debt was mostly used sporadically to recover from economic downturns, but governments realised that it could also be used in non-crisis periods for various purposes, such as funding public welfare systems, infrastructure projects, business subsidies, investments, and so on. Since the 1970s, debt has been rising exponentially, and we are now increasing the money supply and debt faster than economic growth. As of 2025, the world money supply is increasing by 7% year over year, while the world GDP is growing only about 3% per year.

We have been accumulating financial claims on a real world that is not growing nearly as fast. U.S. debt (including federal, household, and business debt) now exceeds $100 trillion, more than 340% of GDP, as shown in Figure 9A below. The $35 trillion often cited is only the federal portion. Meanwhile, the value of physical U.S. currency in circulation is just $2.3 trillion. The leverage in the system is staggering.

Figure 9A: GDP growth against debt growth in the USA

Globally, reported world debt stands at $345 trillion, but once off-balance-sheet liabilities, shadow banking and synthetic leverage are accounted for, the figure likely approaches $600 trillion. Compared to a world GDP of $106 trillion, that's about six years of value creation in debt. For every dollar of added value in the world, there are six dollars of debt in the economy.

From a biophysical perspective, these are not just numbers. They represent promises to deliver real goods and services in the future. Promises of future energy, labour and materials. If these resources are not available, these promises cannot be kept. The system will adjust through inflation, default, restructuring or collapse.

The 4 ways out of a debt spiral

There are only 4 ways out of a debt spiral: Austerity (or war), default, growth, or inflation (or money printing).

Austerity is when the government spends only what it collects in taxes. No new deficit is added. This would mean cutting some subsidies, reducing spending on infrastructure, education, health and pensions. These measures are very unpopular and would lead to social unrest and massive protests. Politicians want to be elected and re-elected, so austerity is not a political choice to maintain social cohesion.

War is also a kind of "austerity" or sacrifice: Civilians lose their property, rights and privileges for the good of the nation. Private companies are reassigned to wartime tasks, and civilians are conscripted into jobs that support the nation. In essence, the government has the extraordinary power to conscript people and businesses for the purposes of war. If the country eventually wins the war, it usually gets new resources or control over land, people and minerals.

Figure 9B: Evolution of US debt to GDP the last 200 years

Looking at the long-term chart of the US debt-to-GDP ratio over the last 200 years on figure 9B above, we can see that every major spike was due to a significant war. However, since 2007, debt levels have increased during relatively peaceful times without major wars. Also, every major decline in the ratio has followed a war. Could this be telling us that a global commercial war involving commodities, energy and minerals is on the horizon?

The substantial decrease in the debt-to-GDP ratio from 120% in 1945 to 30% in 1970 was made possible by the fact that the US emerged from the Second World War relatively unscathed. This led to an influx of gold into the US and established the US dollar as the world's reserve currency, effectively forcing other countries to convert any surplus trade balance into US Treasury bonds, which could then be used to finance US debt. From 1945 to 1980, a young labour force returned from war duty to work in industries. Instead of producing bombs and fighter jets, they produced goods and services for society. The growth in oil consumption boosted productivity, while globalisation and imported deflation increased purchasing power. In the 1970s, the baby boomers became young adults and consumers. A massive wave of young consumers entered the market, buying goods and services, which led to a decade of high inflation. However, none of these explanations or scenarios are relevant today in the context of reducing debt.

Default is when a government decides that it cannot or will not pay its debts to its lenders/creditors. The consequences are massive: The nation would lose its international credibility, new potential lenders would demand an astronomical interest rate to lend money again to the government, so the nation would no longer be able to import products from other countries due to massive currency devaluation. Now that we live in a globalised world and every country trades with dozens of other countries, going back to living on your own would be a sudden return to mass poverty and supply chain disruption. So it generally doesn't happen unless the nation is really bankrupt, that's really the last resort. Governments defaulting almost never happened in history.

Individuals, businesses and countries that owe debt denominated in units that cannot be printed, such as gold or foreign currency, can default if they lack the cash flow or assets to cover their liabilities. However, governments of developed countries, whose debt is usually denominated in their own currency, which they can print, rarely default. A far easier option for them is to print money, thereby reducing the value of the debt relative to the country’s economic output and scarcer assets.

Countries and governments print money by issuing bonds that they sell. The buyers and holders of this debt include pension funds, insurance companies, banks, the central bank, retirees' social security funds, and foreign sovereign nations. Defaulting would be extremely painful and problematic because none of these entities would ever buy treasuries again, greatly impairing the US's ability to convince others to do so in the long term and essentially forcing the government to balance the budget immediately.

Growth is usually the way out. In 1945 the US had 100% debt to GDP and was able to grow its economic output to repay its debt to about 30% of GDP by 1960. This was possible because of the massive use of fossil fuels, technology and a growing working population. The problem is that most of the developed world now has a declining working population, so economic output is likely to decline or remain constant at best, not grow. People will point out that technologies like AI will increase our productivity, but this is wrong at global level. AI will definitly boost productivity at company level, with less payroll needed for the same output. But at a global level, AI and robots are not consumers and do not pay taxes, so the AI revolution will not affect the government budget deficit and public debt issue. Since 2000, productivity gains are about 1% a year in terms of GDP per capita, even with Internet and smartphone supposedly boosting drastically our productivity, it has hardly an effect on total GDP. The main driver of growth in the 1970s to 2000s was the growing labour force of the baby boomers, rising female participation in the labour force, and declining fertility rates that extend the careers and spending of childless adults. This was the real reson behing a 5% GDP growth in industrial countries, not the technology and innovation. In the 2000s and 2010s, the internet and smartphones were thought to have boosted productivity, but in fact per capita productivity growth was limited to around 1%. The internet has changed the world, but most of the GDP growth was still due to the growing labour force and falling birth rates, which means more time for work and consumption, and more female participation in the high-wage labour force.

AI will increase the profit margin for companies and cover some labour shortages, but AI will not consume and buy products, will not pay taxes and will not replace social service jobs such as child care, elderly care, cleaners, cooks and waiters, etc. From the 2020s onwards, the working population is declining in most industrial countries, all women are already fully part of the workforce, so there is no way to grow the economy, which is reflected in an average GDP growth of 1.5% for OECD countries over the last 10 years, compared to 5% in the 1970s and 3% in the 2000s. In fact, only massive new debt has been able to sustain growth since 2008.

People are counting on the AI boom to boost productivity, and AI and robots will definitely help to increase it. However, AI will not contribute to GDP growth or the growth in consumption and sales of goods and services. In the second half of the 20th century, economic growth came from increased hydrocarbon consumption by machines, which kick-started globalisation and led to cheaper goods and services. Suddenly, many goods and services became affordable for average families, and people started buying more of everything. The growth in fossil fuel consumption and the growth in the active population were the two main drivers behind GDP growth of between 5% and 7% per year. AI will not lead to increased consumption. AI will enable companies and individuals to perform digital or intellectual activities more quickly and cheaply, but it will not generate any new products or significantly reduce the cost of goods and services as globalisation did. Whatever AI does or generates is based on existing human data and knowledge. Perhaps I am wrong, and AI robots will soon be able to accomplish tasks for a tenth of the price of humans, thereby lowering the cost of everything and boosting consumption and GDP. This would increase tax revenue and the ability to reduce debt. However, I am sceptical that these potential gains will materialise quickly enough to compensate for the imminent drastic reduction in the population of 20–45-year-olds, who are the main consumers. Let's see when AI robots can work in restaurants (cooking and washing up), prepare hotel rooms, maintain streets with properly laid pavements and bitumen, install solar panels on roofs, dress and wash elderly people or change babies' nappies for a cost below the salary of a human worker. I have no doubt that autonomous driving, digital media creation (text, slides, images and videos) and working autonomously in a warehouse are possible and coming soon, but I doubt that they can help to lower the cost of low-skilled labour.

This leads us to the chosen way out of the debt trap, which is money printing and inflation: New debt to inject into the economy, new debt to service the previous debt, new debt to pay for the growing needs of the health and pension systems. Since the financial crisis of 2008, economic growth has no longer been able to service the budget deficit and the debt, and we have been in a debt spiral ever since. the least painful way out is to take on more debt every year, kicking the problem down the road, further away, and making it a little bigger every year. The problem is that in a debt spiral, the debt grows bigger every year, and the budget deficit will grow exponentially. The debt-to-GDP ratio will grow year after year, and this will lead to structural inflation and then hyperinflation of more than 20% a year until the whole financial system collapses.

Money printing is the least painful way out at the moment, but the end game will be much more painful than if we had dealt with it year by year since the 2000s.

We could implement big policies and austerity to get out of this, but it would be extremely painful for several years, nobody wants a severe crisis of poverty, empty shelves in supermarkets, massive unemployment rates... so we have chosen the soft way out by inflating our debt away and printing money as a solution to every problem. This slowly reduces the purchasing power of all of us and spreads the pain over the whole population, apart from the top 5% of earners and invested wealthy people who grow richer faster than enybody else, aggravating social inequalities. Public pensions problem, health care overcosts, energy crisis, renewal of infrastructure, military spending... the solution is always to print new money. For the moment, this money remains essentially in the hands of banks, big investors, asset owners, hedge funds, so we do not see inflation in the real economy, but rather in the value of assets. Money printing has created massive social inequalities. In the coming decades, the next step will be to print so much money that inflation will start to rise. When the need to borrow is so great, governments will not be able to find enough private investors, so the central banks will step in and print money, devaluing or debasing the currency. This will lead to a spiral of high inflation and a major financial crisis that will cause our civilisation to collapse.

Print your way out of any problem

Governments will run bigger deficits in the coming years and will have to print more money year after year: The ageing population will put a strain on public social security and healthcare systems, so we will have to pump money to keep our pensions and hospitals running. In Europe, the workforce will shrink due to the demographic payback period, which will reduce our tax revenues and exacerbate our budget crisis. The economy will not grow, we will struggle to keep GDP growth barely between 0% and 1%, and in the countries with really bad demographics, real GDP output will fall. The lack of growth in tax revenues will have to be made up by new borrowing, by printing new money. Climate change and natural disasters such as floods, forest fires, water shortages, hurricanes and heat waves will become more intense and more frequent, causing significant damage and increasing the spending bill. Worst of all, the cost of servicing the debt increases enormously, especially with rising interest rates, because investors know that governments can no longer support their spending with economic output, and so fewer investors are willing to lend money to broke governments in exchange for a stable return (the treasury bond), so interest rates rise, making the interest payment on the debt an even greater burden on public spending. Interest payments on the debt take up more of the government budget, which we can no longer afford, and so we have to create new debt to pay the interest on the existing debt. All in all, there is no other way than to print more money and create more government debt year after year.

Central banks can print new money at any time by creating new debt and pumping it into government budgets, economies, stimulus programmes, big banks, servicing old debt, direct cheques to households, spending on national defence, etc. This new influx of money, created out of thin air, devalues the existing currency, makes things more expensive (rising inflation) and reduces our purchasing power. You can imagine that if everyone's salary doubled overnight, a few months later the prices of goods and services would also double because there would be more money in the economy to buy those same amount of goods and services, pushing up the prices.

Money printing is the solution to every problem, but when overdone, it causes inflation. Money supply, or the total amount of money in circulation in an economy, is the key driver of price stability and inflation. If the economy grows by 2% in a given year, the money supply should theoretically grow by 2% to accompany and support this physical growth in goods and services. If the money supply grows by 5% in that year, it will theoretically increase inflation by 3%, the difference being that more money is added to the economy than the sum of the goods and services available for purchase. Inflation initially manifests itself in the form of higher profits for big banks and big companies, rising asset prices such as gold, property or shares, but eventually it's the cost of everyday life that goes up: food prices, rents, energy bills, the cost of services, the cost of goods and so on.

Figure 9C: Money supply and inflation in the US

Take a look at Figure 9C above, which shows the annual change in the money supply M2 (often referred to as the amount of liquidities in the economy) in the US compared with the rate of inflation. Firstly, you can see that the green curve of money supply is almost always above the blue curve of inflation, which means that the difference is money going into assets such as houses, gold, stocks and into the net worth of the richest 1% in the world, which is essentially the reason why the rich get richer and the poor get poorer over time. You can also see that when the money supply rises sharply, usually after 1 to 3 years, inflation catches up and rises as well. When too much money is created, faster than the economy is growing, it goes to companies and a few rich people at the top. With an average annual money supply of 8% and an average inflation rate of 3% over the last 70 years, this means that the richest people at the top collect 5% of all the new money supply and only 3% goes down to the average worker, which then over time gets into the real economy and the prices of goods and services go up by 3%, and that's how you get inflation.

The Covid 19 pandemic is a good example: In 2020 and 2021, people were confined to their homes, some businesses shut down, but people kept their full income and received some government benefits. There was a huge increase in government spending and new money supply, up to 27% increase in new money supply. Then, in 2022, the inflation rate followed, reaching up to 12%.

Covid-19 was an exceptional event, and the period 2020-2023 showed an explosion in money supply and inflation. What happened in those three years was extreme, but the exact same thing will happen in the next 30 years, on a smaller scale, spread over three decades: Rising money supply and rising debt to solve all sorts of problems, currency debasement, rising inflation, rising asset prices. The demographic downturn in Europe will be the final blow to public finances. As the population ages and the workforce shrinks, how will tax revenues be able to cope with spending on health care, pensions and debt servicing? This is truly a death sentence, an unsolvable debt spiral that can only end in high inflation, social unrest and a blow to prosperity.

Governments around the world are increasing their budget deficits year after year, meaning they need to borrow more and take on more debt. In order to find willing lenders for this increased borrowing, you will have to offer higher interest rates to entice the lenders. This is what the supply and demand market for debt leads to: Higher interest rates for borrowing since 2021. Higher interest rates mean that governments must now pay a higher price to service all past and new debt. The cost of servicing debt is rising and reaching close to 10% of national budget spending, on a par with education and/or defence spending, and catching up with or reducing the room for healthcare and pension spending.

France is expected to spend €62 billion on debt interest in 2025, which is roughly equivalent to its combined defence and education spending. In many countries, spending on debt interest now exceeds the budgets of major government departments such as defence and education, and is in line with healthcare and pensions. In the coming years, servicing the debt is expected to continue taking a larger share of budget spending in all industrial economies worldwide.

However, finance ministers do have some options. Governments and treasuries will have to manoeuvre through a glut of long-term debt using various tactics. These include central banks cutting short-term interest rates, issuing more short-term debt and less long-term debt, and the greater involvement of central banks in buying debt and injecting new liquidity into the economy, a process known as QE (quantitative easing) for more money printing, or QT (quantitative tightening) for less money printing. Other classic options, such as reducing public spending, are unpopular and unappealing, and increasing economic growth is almost impossible due to ageing demographics and rising geopolitical tensions.

Some treasuries have switched to issuing more short-term debt, where yields are more dependent on interest rates set by central banks than on investor demand and inflation dynamics. Central banks in most major economies are still cutting interest rates, which has kept short-term rates relatively stable. However, they have less influence over longer-term borrowing costs. There, investors' expectations of inflation — which can reduce the fixed returns offered by bonds — and concerns about excess supply are also important factors. Issuing more short-term debt than long-term debt merely postpones the moment when the debt must be rolled over or refinanced. This is merely a tactic to buy time, not a solution to the real issue.

This scenario is likely to become more prevalent in all economies: Central banks will set low short-term interest rates (1% or 2%), and governments will borrow most of their debt on short durations (two years or less), with interest rates closer to those set by the central bank than to those set by the market on long-term debt (4% or 5% on ten-year-plus bonds). This strategy is a recipe for money printing, asset inflation and ultimately high inflation of goods and services.

The structural inflation that we will soon face is different to the high inflation of the 1970s. In the 1970s, we experienced a decade of high inflation, primarily due to private banks lending money for mortgages to young baby boomers adults buying homes and cars. Rising interest rates were effective in reducing lending and inflation at that time. However, in the coming decades, most of the growth in the money supply will be due to government deficits for pensions, social spending, and healthcare for an ageing population. In this case, rising interest rates are not effective; they are even counterproductive because higher rates increase spending on servicing the accumulated debt. This generates more borrowing, and printing money devalues the currency and generates inflation. I believe that lower rates of below 2% are the only option for governments to have a reasonable budget, even if it means issuing short-term bonds at rates set by the central bank. Today's demographics completely challenge the established approach of using high rates to combat inflation and low rates to stimulate the economy. We might need low rates nowadays to combat inflation due to a large budget deficit.

As it stands, politicians are incentivised to please citizens in the present moment in order to be elected, endorsed and re-elected, and to avoid civil rebellion and anarchy. These incentives lead to increased spending and debt in an attempt to please everyone, with no unpopular decisions regarding spending cuts to pensions, healthcare, education or infrastructure.

If we wanted politicians to act in the best long-term interests of the country, they would pass a law stating that if the deficit exceeds 2% or 3% in any given year, all members of Congress, the Senate and the ministries would be fired and unable to stand for re-election. This would incentivise politicians to manage the budget properly, make tough and unpopular decisions regarding spending cuts and ensure that public debt never grows to an unsustainable level, as it is today.

The maximum permitted deficit would equal the nominal GDP growth rate or the growth rate plus the inflation rate. If a country had 1% growth and 2% inflation, the maximum deficit would be 3%, as this could be offset the following year by nominal GDP and tax revenue growth of 3%.

Politicians would be fired in any year that they did not keep the budget deficit below this threshold. Unfortunately, no politician in the world would voluntarily restrict their power and manoeuvrability by passing a law to do so. Consequently, budget deficits in advanced economies are growing every year.

The looming high inflation or hyperinflation

As shown in Figure 9D below, the money supply has grown continuously at a rate of around 7% per year, through the ups and downs of economic cycles and political turmoil.

Figure 9D: Global world money supply since 2000

Money is created by private banks to buy things that we can only pay for later, but it is also used to finance large public deficits and pay lenders interest. In the coming decades, mainly due to demographic changes, the government will have larger deficits and will need to borrow more money. This will push interest rates higher, meaning that governments and central banks will have to print more money to service the high interest on the total debt. We will then enter a vicious circle where more money needs to be created each year only to service the interest of past debt. This money mostly ends up in asset prices, such as gold, stocks and real estate, but also in the inflation of everyday goods and services. To put it simply: Fewer adults producing, consuming and paying taxes, combined with more elderly people receiving public pensions and healthcare, combined with higher interest rates on debt, means more borrowing, leading to more money printing and sustained high inflation. Governments and central banks are really in a trap — a situation with no good outcome.

Central banks of industrialised countries are caught in a dilemma: They need to cut interest rates low enough to stimulate the economy, provide liquidity to the economy by buying government bonds and printing money, in order to achieve 2% GDP growth and be able to afford the servicing of the government debt that has accumulated. But central banks also have to raise interest rates high enough to prevent too much credits being issued, not provide too much liquidity in the system or not avoid too much money being created too quickly, that would lead to currency devaluation and inflation. This is a really fine balancing act, and judging by the last 30 years, for the sake of social stability and civil unrest, governments have opted to keep the broken system running for now to please everyone, via more more budget deficits and more borrowing, at the expense of major inflation later in the coming decades. Continuous inflation of 10% to 20% per annum over a decade is entirely plausible, and this could eventually lead to an inflation rate of 50% or more. Hyperinflation is a possible scenario, it has happened in the past in Germany in the 1920s and more recently in Argentina in the 1980s and 1990s, Zimbabwe in the 2000s, Venezuela in the 2010s, and Turkey and Lebanon in the 2020s. High inflation of over 10% per year, or hyperinflation of over 30% per year, could happen simultaneously around the world in the coming decades, similar to the "Great Inflation" of the 1970s that lasted a decade. It is a very plausible scenario due to the level of public debt around the world.

Hyperinflation in Germany in 1923 led to the currency being worthless

Hitler was appointed in 1933 and given full power because the population had been devastated by hyperinflation in the previous decade. Similarly, Javier Milei was elected in Argentina in 2023 due to years of hyperinflation; the people had suffered for so long that they were ready to accept drastic and painful changes at a governmental level.

A population needs to experience prolonged economic hardship in order to tolerate and undergo drastic changes to the social welfare system and government spending. The Western world is still doing fine, and life is far too convenient to make any significant political reforms or drastic changes to welfare spending or debt levels. Unfortunately, we must suffer for long enough to be willing to address the looming debt crisis.

In 2008, inflation in Zimbabwe was running at around 230 million percent and the Zimbabwean dollar was so devalued that a loaf of bread cost 300 billion dollars. The National Bank issued a 100 trillion dollar note. Yes, 100,000,000,000,000,000 dollars in Zimbabwe in 2008 would only buy you 50 loaves of bread. A year later, the Zimbabwean dollar was abandonned.

What you needed to buy 10 loaves of bread in Zimbabwe in early 2009

The euro and the US dollar will never reach this level of inflation, simply because of the size of the economy, the size of the population using the currencies and the inertia of the economy. But sustained inflation above 10% or 30% is certainly plausible. In most industrialised countries, the debt-to-GDP ratio is close to or above 100% and rising every year. No country is in better shape than another, with the possible exception of Germany, which has a debt-to-GDP ratio of 60%. The reason we have so much debt is that central banks have been so accommodating to borrowers, cutting interest rates since 2009 and keeping them extremely low for years. It got to the point in 2021 and 2022 in Europe where the interest rate was negative, which means we were paying people to borrow money, which makes no sense at all. And so, as a result of artificially low interest rates, governments, households and companies all took on far more debt than they could reasonably service in a normal interest rate environment, and debt that they can't repay in any environment, even taking on more debt to repay past debt.

When credit is free, no company can ever go bankrupt. And so we are facing a debt crisis, which will eventually become a currency crisis, because what happens when you can't pay your debts is that you print money. And if you print money above the rate of economic growth (GDP), you reduce the value of the currency. That's where we're heading, maybe in 5 years, maybe in 30 years, but we're definitely heading towards an Argentina or Turkey style devaluation of currencies. The question is not which currency will lose the most or the least against another currency, because all currencies will devalue. The question is how much purchasing power all the currencies will lose and how fast. This includes the US dollar and the euro.

We won't see inflation of more than 100% in the US dollar or euro areas, as we did in Argentina, Zimbabwe and Venezuela in the past, simply because of the size and inertia of strong economies such as those in Europe and the USA. However, sustained inflation of over 10%, as seen in the post-Covid era of 2022, is a realistic scenario for the coming decades. This would mean that interest rates would be closer to 10% or 15%, debt interest would represent around 30% to 50% of government budgets (instead of the current 10%), and the spiral of issueing new debt to service past debt would be inevitable, leading to economic collapse and severe currency devaluation. As has recently happened in Turkey, salaries would not catch up with inflation, and low-income employees, especially state employees, would experience a drastic loss of purchasing power. Now imagine the massive social protests, turmoil and civil unrest that would be generated if the 2022 peak in post-Covid inflation were to be sustained for five years.

In 2008, we were able to save the banking system by pumping 20–30% of new public debt into the financial system. We were also able to bail out Argentina and Greece recently because they are 'small' economies on the world stage. However, there is no 'big brother' to rescue the US dollar, the euro or even the Japanese yen at that size, especially when all currencies are debased at the same time.

Figure 9E: Debt, money supply and interest rates in USA over the last century

Figure 9E above shows that the money supply and federal debt-to-GDP ratio tend to rise when interest rates are falling or remaining low. This is because financial conditions for borrowing money become easier and more money is lent into existence. Additionally, the level of private debt in the USA has been soaring post WW2, with many young adults drowning in debt and living from Paycheck to paycheck.

Look at Figure 9F below, which compares the level of debt, the inflation and the interest rate in the USA.

Figure 9F: Debt, inflation and interest rate in the USA

The key point from figure 9F above is that market participants buying government debt will demand an interest rate (in brown) that is higher than inflation (in blue). They will demand an interest rate on government debt roughly equal to the sum of GDP growth (around 2%) plus inflation. Also, government debt (in green) fell between 1950 and 1980, when the interest rate (in brown) rose. When interest rates are high, debt is more expensive to service, so you need to reduce your debt quickly. Since the 1980s, interest rates (in brown) have been falling, allowing governments to take on more debt (in green) without paying much in the way of total interest payments. This was the case between 1980 and 2020, leading many countries to take on more debt as it became cheaper to service it each year. But since 2020, this has reversed and we seem to have entered a new cycle of rising interest rates. The current interest rate of 3.5% to 5% is expected to remain high or rise for decades to come because the debt level (in green) is now extremely high and investors know that there will be no economic miracle in the coming decades: No baby boom entering the workforce, but rather a stabilisation or contraction. No economic boost from women's participation in the labour force as in the 1970s to 2000s. Women now work as much as they can or want to. No big boost from oil and gas consumption and machines replacing human physical labour. That has already happened. The only prospect is more welfare spending and more pensions and entitlements, which means more money printing and more inflation. Back in 1980, it was possible to pay 12% interest on the debt because the government had only 30% of GDP in debt, meaning that about 3.5% of GDP had to be spent on debt servicing, and the economic growth rate at the time was over 6%. But now, in 2025, there is 120% of the debt-to-GDP level with an interest rate of 4.5%, which means that 5.5% of GDP will be used to service the debt, a larger proportion than in the 1980s and definitely above the economic growth rate of about 2%. If interest rates were to stabilise at 4%, or even rise to 5% or 6%, this would be disastrous for the federal budget, as even more of the value added to GDP would have to be used to service the debt. This is likely to lead to a debt spiral and no convenient way out other than printing new money and inflating assets, inflating the net worth of the world's richest 1% and eventually inflating ordinary goods and services.

The most likely scenario for the next 3 decades is the following:

Governments will continue to need to issue more debt year after year to service past debt (pay interest on previously issued debt), to cope with an ageing population, and to provide a rapid contingency plan for global events such as war, pandemics, natural disasters, geopolitical tensions, etc.... There won't be enough investors to buy the newly issued debt via bonds, simply because there are more needs to borrow than willing buyers of government debt. Also, since all industrialised countries are facing demographic collapse and rising budget deficits, most will issue additional debt and have to outbid each other on interest rates to attract borrowers. For example, if the USA offered me 5% interest per year but the UK offered me 7%, I might choose to lend money to the UK rather than the USA, unless the USA offered an interest rate of 7.5% on its debt.

As more money is needed in every country, this will lead to 2 things: higher interest rates to attract investors, and central banks have no choice but to buy these bonds, either to lower interest rates because debt servicing has become unbearable, or to act as the lender of last resort for borrowers who cannot be attracted on the market. When banks buy bonds, they create money out of thin air to pay for them, which increases the money supply and, over time, will steadily increase inflation, especially in an economy suffering from a shrinking workforce.

When banks buy bonds at a rapid pace and inject liquidity (cash) into the economy much faster than it is growing, it generates inflation. This triggers investors to demand a high interest rate on the bonds they purchase, in order to at least beat the expected future inflation. Once inflation is sustainably high, the central bank has no choice but to buy most of the newly issued treasury bonds to create artificial demand and reduce the interest rates on those bonds for investors. This strategy is called 'yield curve control' and essentially involves the central bank manipulating the market to make future debt more affordable for the government by lowering long-term interest rates and making new debt less costly and more manageable.

Without "yield curve control", high inflation would force ordinary investors to demand higher interest rates on debt. Investors buy government debt because they believe they can at least beat inflation, as shown in Figure 25 above. Higher interest rates mean that the government will need more money to service past debts, so it will issue more debt and bonds year after year, and we will enter a vicious circle, a debt spiral that grows exponentially and ends in high inflation of 20% or 30%, or perhaps hyperinflation of 50% or more, and the collapse of our economies, the end of civil peace and prosperity.

The vicious circle of high interest rates and debt levels

What I expect to happen in the coming years is as following: Markets will demand a higher interest rate on long-term government bond borrowing, making servicing debt at high rates unsustainable. As long-term interest rates rise, central banks will lower short-term rates to close to zero. Most public debt will be issued in the form of short-term treasury bills (with a maturity of one year or less) at close to zero percent interest. This will reduce the cost of servicing public debt and prevent it from becoming a huge burden, as Japan did from 2010 to 2020. The problem is that when all public debt is short-term and the total debt is very high (above 100% of GDP), the central bank has no manoeuvre room and must maintain low rates close to zero; otherwise, all the public debt would have to be rolled over and refinanced at a high interest rate, causing the government to become insolvent and resort to printing money. The issue with central banks being forced to maintain low short-term interest rates is that this creates an infinite loop of free money for banks and big businesses, adding more money to the system and generating high inflation. Central banks will have no way to stop this because they must keep interest rates low to service the huge public debt.

I do not see any other way out, given our demographics, the fact that most of the young adults in the industrialised world are already educated beyond secondary level, and that the female participation in the labour force is already high above 60%. Where will an economic boom like the one from the 1950s to 1980s come from? All the evidence points to more AI and robots, but less overall economic output for the nation. Our only hope for sustainable prosperity is a massive deployment of AI and massive immigration, and neither will solve the national debt problem any time soon, because AI and robots don't consume stuff and don't pay taxes, and social immigration is mostly a negative cost for years until the migrants are integrated and productive to society.

From the 1970s to the 2010s, the world experienced a period of growth and abundance, marked mostly by peace and globalisation, which was deflationary. From the 2020s onwards, however, we have entered a world of shrinking supply and shortages, which will lead to inflation across the developed world. This could result in high inflation, or even hyperinflation. The recent rise in the price of gold since 2023 (and the rise of bitcoin) is a sign of instability, uncertainty and risk, as well as a lack of trust in the monetary system, particularly when bought by central banks.

The last five decades were mostly an age of plenty, characterised by stability, prosperity, growth and abundance, as well as stable prices. Globalisation and the rise of China, India and Eastern Europe enabled massive growth and cheap, abundant production in a deflationary environment with lower prices overall. Demographics also played a role, with the baby boomers boosting the labour market supply from the 1970s to the 2010s and generating an abundance of labour, consumption and tax revenue to fund private and public debt. Increased demand for energy was met by cheap, abundant and efficient fossil fuels. Corporations focused on efficiency to improve margins and productivity. The geopolitical world was relatively peaceful and spending on the military was low.

However, since 2020, all of this has been reversing and we have entered an age of scarcity. Globalisation is turning into regionalisation and friendshoring, and there is a growing polarisation between the USA and its allies on the one hand, and the Global South (BRICS) on the other. China is no longer the low cost high growth superpower that has driven low production price over the last 40 years via outsourcing all world factories to China, and China is facing economic turmoil, a real estate crisis and a demographic crisis. Europe has significant social welfare issues that will worsen with its ageing population. Fossil fuels now have a lower EROI and are heavily taxed for decarbonisation purposes. The push for an energy transition has already moved energy prices up for consumers. Electrification has increased demand for metals and materials, and production does not always match this high demand, which raises the demand of raw materials like copper and will lead to periodic spikes in price. Climate change will require increased spending on adaptation, maintenance, repairs and rebuilding, which will lead to inflation. Companies are now prioritising resilience over efficiency in order to diversify their supply chains, which is inflationary. Military spending is back on the agenda, and this is very energy- and capital-intensive.

Workers exert deflationary pressure because, by definition, they produce more than they are paid for. Otherwise, they would not get the job. The more workers there are in an economy, the better. Pensioners are an inflationary pressure because, like other adults, they consume goods and services, but do not provide any in return. The more pensioners there are, the higher the taxation level and the lower the overall purchasing power. A world with fewer workers and more pensioners is structurally inflationary. Add to that geopolitical deglobalisation and the accumulated debt burden of the last 40 years, and humanity will enter a world of relentless inflationary pressure. Also, our economy is consumption-based, growing through consumption credit for houses, cars, etc. When the population bracket of 25–45 year olds shrinks, the consumption base shrinks, putting more downward pressure on the economy and upward pressure on tax levels.

The demographics of developed countries have shifted from a large working-age population to a large elderly population, which puts pressure on less taxpayers to support more welfare beneficiaries, thus pushing up inflation. Many factors that were positive overall in the 1970s and 2010s are turning into negatives in the 2020s and beyond, which is likely to lead to fundamentally higher inflation, higher interest rates and lower economic growth.

Every financial crisis in recent history has been bailed out by a larger entity, which itself failed during the next crisis:

When businesses are on the verge of bankruptcy, larger companies step in for M&A (mergers and acquisitions) to give the smaller company a second chance.

When major companies that are key to the nation in terms of intellectual property, the military or employment run into trouble, some big private banks step in to save the day by injecting liquidity into the business.

In 2008, when private banks ran out of liquidity due to excessive debt leverage, governments stepped in to save the big banks and major lenders, thereby saving the financial system. This was achieved through refinancing the banks with new debt issuance, as well as taking savings from taxpayers and increasing tax rates in the economy over the following years, and by creating more debt in the yearly fiscal budget.

Following the 2020 Covid-19 pandemic, governments and central banks forced people to stay at home and stop working. People were bailed out by receiving free benefits via money printing, which increased sovereign debt levels tremendously and proactively chose inflation over the natural deflation that would have occurred in a lockdown.

Now that most governments are entering a debt crisis and facing a level of debt servicing that the natural growth of the economy can no longer sustain, who is going to save them?

If they continue on their current path, governments will default soon. How will they deal with this crisis, and who will bail them out? Governments and national budgets are the biggest entities, so when the sovereign debt issue blows up, the only solution will be for central banks to print money, issue new liquidity and generate sustained high inflation. This could last for a decade; each year, more money would need to be printed at higher rates until financial repression and capital controls are reached. Ownership rights will vanish, and people's savings and assets will be seized by force by public authorities. The entire financial system will be hit by high inflation, and trust in institutions will disappear. Civilisation will collapse into poverty and civil war, and all our societies will descend into anarchy. It happened in past civilizations over and over again, and we are not immune to it. We will experience a painful reset of our society and governance.

Conclusions

Politicians tend to create more debt and inject it into public spending to satisfy the current citizens, to avoid civil unrest, and also to endear themselves to the public and get re-elected, and also to keep the system running as it is, not necessarily adding assets that will generate future economic growth .... All the impossible burden of debt accumulation is passed on to the next decade and the next generation as debt accumulates and piles up. Debt should only be used to invest in future returns, value creation and future growth. Debt is now being used for regular maintenance on a political and welfare system that needs more and more maintenance. Most of the debt is now just to keep the system running, without adding value or growth in the future. This accumulation of debt cannot be repaid by additional growth or production in the future because the growth of debt is much greater than the growth of the economy.

The debt-to-GDP ratio measures this burden and a country's ability to manage its debt. Most industrialised countries now have a debt-to-GDP ratio of between 70% and 140%, a figure that is rising every year, meaning that future generations will have to pay for the current generation, which has been the case in Europe and North America since the 1980s and has accelerated dramatically since the 2008 financial crisis. What happens if we don't have enough energy (thus materials) to generate revenue and pay this debt? What happens when we have less workers expected to service that growing debt? What if we have de-globalisation and a more multipolar world with more geopolitical tensions, leading to supply chain disruptions and recessions? We run huge deficits every year, borrowing from tomorrow to spend today. The system is deeply corrupt because it benefits the current power brokers who run our countries today, the old and wealthy, to the detriment of low-income workers and to the detriment of our nation's future. The debt trap will lead us to hyperinflation, a drastic loss of purchasing power, severe economic austerity and the collapse of our prosperity and civil order, and like to the loss of our democracies.

There are really no good solutions for governments to reduce the budget deficit and the debt burden. If the government raises taxes to collect more, businesses will suffocate and become uncompetitive, especially in Europe, and move elsewhere, providing zero tax revenue. If government raises taxes on goods and services or income tax, it reduces overall purchasing power and infuriates the low paid and middle class who are already seeing their purchasing power slowly eroded, risking massive protests. If the government cuts spending on pensions and welfare, there is also a massive wave of social unrest, protests, riots. People are far too attached to their social benefits, a system that has been in place for generations since 1950.

At the end of the day, governments can neither reduce public spending nor increase tax revenues. And as the population continues to age, with more spending on health care and pensions, while the workforce shrinks year after year with less total GDP output and less tax revenue, the budget deficit is bound to grow, and only new debt can cover these growing deficits.

Debt levels are now around 80% to 120% of GDP in most advanced economies, back to where they were in 1945. Only this time the working population will be shrinking in the coming decades, which means a reducing real GDP output, a shrinking consumer base and shrinking tax collection, all detrimental to the revenues needed to service the debt, while a horde of people over 60 will be entitled to large pensions, frequent public health care and other social benefits. This is completely unsustainable. AI and robots will improve productivity, but AI machines do not consume or buy goods or services, nor do they pay taxes. AI and robots are not a solution to debt, only a solution to a shrinking workforce, and a solution for shareholders of companies to make more profits.

Governments are addicted to debt and there is no way out except currency debasement, high inflation, drastic loss in quality and quantity of public services like infrastructure, health care and pension spending, and it will lead to social unrest and civil war. Financial collapse is inevitable, it is only a matter of time. It could happen in 5 years or in 40 years, but it will happenthe coming decades. Debt will continue to grow until debt servicing becomes the largest part of public spending, growing year after year, and there will be no room for anything else, nor will there be new investors willing to lend money to governments.

There are only 3 ways out of a debt spiral when government debt is so high that the economic growth can no longer service the debt accumulated in the past: War, default or inflation. the latter is obviously the softest outcome because it spreads the pain over all citizens and over several years. That's almost certainly where we're heading.

Unfortunately, sovereign debt crises and wars tend to occur in clusters. One tends to lead to the other, in both directions. War is expensive and thus leads to high sovereign debt levels. Conversely, high sovereign debt levels can lead to more severe political decision-making, asset aquiring and territorial expention, which can ultimately lead to war. When public spending exceeds tax revenue and reducing spending is unpopular, some authoritarian governments have no choice but to exploit more resources (hydrocarbons, minerals, land ownership, etc.) for more tax revenue through war, oppression or geopolitical leverage. Sovereign debt can only be resolved through default, sustained high inflation or increased resource extraction. Huge financial imbalances in spending and the expectation that the state will provide everything, built up over decades, tend to lead to rising levels of populism, more extremism, and authoritarian leaders who who have a prononced trait for domination, control, exploitation and imposing fear.

Throughout history, a few species, civilisations and empires have ended due to war or conquest (as with the Incas), or collectively due to a meteorite impact (as with the dinosaurs). However, most often they have ended due to hyperinflation, currency debasement and plummeting resources, followed by mass poverty. The Romans, the Egyptians and the Greeks are examples of this. The difference between the past and today is that 90% of civilisations are now interconnected and interdependent, relying on each other for food, materials, basic equipment, financial services, exports, and so on. 90% of the world's population lives in an industrialised society and depends on hundreds of other countries for food, raw materials, electronics, cement, oil and gas. This means that if one major country goes bankrupt or one civilisation becomes extinct due to demographic collapse, the entire world's logistics and financial stability will be thrown into chaos. When the Incas died out, it had no impact on China. When the Roman Empire collapsed, it had no impact on India. When the Egyptian empire collapsed, it had no impact on the Native Americans. However, if Japan, South Korea or France were to go bust, the entire world would suffer a severe and painful recession.

On top of that, the ageing demographics of all the major economies are degrading fast for all countries apart from those in Africa and the Middle East, meaning we will all slowly collapse together, leaving no strong countries to help out another one. This will definitely happen within the next 40 years, probably sooner. The collapse is inevitable, especially in Europe, because people are too enamoured of and accustomed to privileges like paid sick leave, working 35 hours per week, retiring at 60, receiving a pension benefit at or above the median income in old age, and not being penalised for having fewer than two children. As long as we refuse to give up these privileges, our societies will descend into civil war. The fall is inevitable, but the longer we wait for massive social reforms, the harder the fall will be.

Our financial system is bound to collapse. The main reason for this is that we stopped having children in large numbers in the 1970s and are unwilling to make drastic changes to the broken welfare system that favours the over-60s at the expense of the under-40s. This is the truth that nobody dares to talk about. Instead, the media will blame wars, energy prices, geopolitics, cold winters, politicians, greedy CEOs or whatever the new trend is.

The reality of our demise lies in the lack of children and the intergenerational robbery of the social system. Age-group inequalities are far more critical than social inequalities. Under-40s are the modern-day slaves of over-60s. As the over-60s greatly outnumber the under-40s — including those in positions of power and lawmakers — the system is rigged to transfer wealth from the young to the old. It's no wonder that people are choosing not to have children or to have less of them: The under-40s are exploited in their work and revenues and are being used and abused to support the over-60s. Unfortunately, this trend will worsen in the future due to the low fertility rate and the imminent sharp decline in the under-40 population. We will discuss the main topic of demography in more detail in a dedicated chapter.

Capitalism used to favour the rich over the poor. Now, it secretly favours the elderly to the detriment of the young, and nobody is protesting, complaining or even addressing the malaise publicly. In our next chapter, we will explore how capitalism has reached this point.

Next chapter: 12 – CAPITALISM

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- THE LAST DECADE -
December 2025

Why we are all doomed and there is nothing we can do about it.

Why do we have so few kids, and what are the consequences for society.

The uncomfortable and inconvenient truth about the soon coming end of prosperity in our industrial civilisation.

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THE LAST DECADE

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