Real Estate Investor Magazine South Africa June 2013 | Page 15

W

UPFRONT

hen our parents and grandparents
told us to stay out of debt, they
probably d id not re a l is e t he
impossibility of the task, because in the days
when money was backed by actual, real gold
reserves, they would not have been able to
conceive of the shaky house of cards the global
financial system has become.

The US government debt amounts to about
75% of their GDP. If intra-governmental
hold ings ( gover nment bor row ing f rom
federa l tr ust funds – such as the Socia l
Security Trust Fund) is included, the total
US public debt amounts to $16 trillion - or
$50 000 for every man, woman and child in the
US, according to the Associated Press.

It is a house of ca rds bu i lt on debt.
Governments are trillions of dollars in debt.
Banking institutions have lent billions of
dollars they do not have. And individuals
across the planet are drowning in debt.

In countries such as France (90%), the UK
(91%), Ireland (118%) and Portugal (119%),
the debt-to-GDP ratio is so high that these
economies are in danger of collapsing. And
Japan has recently launched the largest money
printing exercise in its history.

So where does all the money that is being
borrowed come from? As we saw in the May
2013 edition of REIM, money is no longer
backed up by gold reser ves, it is simply
“created” out of thin air through the ‘fractional
reserve’ banking system used by governments,
central banks and financial institutions across
the globe. This system allows these institutions
to “create” the money borrowed through a
“deposit entry” which is based on a borrower’s
“promise to pay” the loan back over time, and
involves no actual deposit anywhere or at any
time. So, the banks do not actually lend out
money they already possess, but rather “create”
the money loaned to borrowers – whether that
is a government or an individual – through
electronic book entries based solely on the
borrower’s “promise to pay”. In simple terms,
“money” is created through debt.
The interest burden caused by this fractional
system is inherently unsustainable, extremely
dangerous and has sparked the financial crisis.
It has also buried governments, f inancial
institutions and people across the globe under
mountains of debt.

Bottomless pit
This is clearly evident in figures that are widely
available (have a look, for example, at www.
economist.com/content/global_debt_clock),
but poorly understood. Government debt
(money owed by a government to its creditors)
is at an all-time high. In April 2013, the debt
held by the US public amounted to a staggering
$12 trillion – that is $12 000 000 000 000.
Because the figures are so mind-blowing,
government debt is often expressed as a
percentage of Gross Domestic Product (GDP),
known as the debt-to-GDP ratio.
www.reimag.co.za

In South Africa, the picture is perhaps
less terrif ying, but it is certainly deeply
concerning. According to ratings agency
Fitch, national government debt rose to
41% of GDP (around 43% including local
authorities) at end 2012, from 27% at end
2008. The Democratic Alliance claims that
government debt over the medium term - and
when contingent liabilities are included - now
extends beyond 50% of GDP. According to
the Economist’s September 2012 f igures,
South Africa’s public debt amounts to R1.4
trillion (R1 431 104 244 620 to be exact)
or R29 335 for each South African citizen
(calculated at 48,7 million people).
Meanwhile, countless financial institutions
around the world are perched on the edge of
f inancial collapse – an outcome that is not
unlikely, given the number of banks that
have already failed or had to be bailed out by
governments.
And the people, too, are in debt. Last year,
the International Monetar y Fund (IMF)
reported: “Household debt soared in the
years leading up to the Great Recession. In
advanced economies, during the f ive years
preceding 20 07, the ratio of household
debt to income rose by an average of 39%
points, to 138% . In Denma rk , Iceland,
Ireland, the Netherlands, and Norway, debt
peaked at more than 200% of household
inco