The Debt Surge Ahead

Haven't we just passed by a dead end sign?

You have been warned. Photo by Varju Luceno on Unsplash

We are in for another huge increase in debt, not only in terms of what the government owes, but all kinds of it. Perhaps this sentiment is nothing new, but can debts indeed be piled up forever? Based on historic data energy prices seem to be a surprisingly good predictor of US debt to GDP ratio, but the recent energy crunch started in 2021 might prove to be too much for the system to handle.

Thank you for reading The Honest Sorcerer. If you value this article or any others please share and consider a subscription, or perhaps buying a virtual coffee. At the same time allow me to express my eternal gratitude to those who already support my work — without you this site could not exist.

This week I was invited to Eurabiamania as a returning guest on the prophets of doom council. Listen in by clicking on the link below:

Eurabiamania 123: Man-Made Horrors Beyond Our Comprehension

Let’s start by stating: government debt alone is just half of the big picture. Despite the fact that household and business liabilities have always been higher than what the government owes (except post WWII years), news outlets seem to be focusing on the federal debt to GDP ratio alone — as if the private sector was doing just fine. But it doesn’t. So why not include that as well? Indeed, taking a glance at all domestic (nonfinancial) debts outstanding US federal debt alone looks almost trivial. The chart below — courtesy of the Federal Reserve Bank of St. Louis — reads $77.2 trillion as of Q1 2025. This metric alone indicates that the current debt crisis is not due to federal overspending alone — rather, it’s a general issue affecting the entire US (and most western) economies (1).

Domestic Nonfinancial Sectors; Debt Securities and Loans; Liability, Level [TODNS], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/TODNS, September 5, 2025.

Now, let’s take a look at the US debt to GDP ratio in light of the above. This time, however, let’s calculate it by using all US domestic nonfinancial sector debt, securities and loans. Logically, if GDP is calculated using the Consumption + Government spending + Investment + Net exports​ formula, why should we compare government debt alone to our gross domestic product? Why not include the debt of all sectors? Upon doing the math, dividing all domestic debt with the gross domestic product for each quarter, a remarkably stable pattern arises over time — interspersed with periods of crisis when this debt to GDP ratio jumped to the next level… Then stayed there till the next crisis arrived.

All US debt to GDP over time, versus the price of electricity (correlation: 0.94). Data source: FRED

This pattern immediately brings electricity prices to mind, the topic of last week’s essay (read it to get a clear picture why electricity prices are a good indicator of economic and geopolitical crisis). What’s even more remarkable than the relative stability of US debt to GDP level is the strong correlation it shows with energy prices. In fact, the correlation coefficient turned out to be 0.94! In plain English this means that the economy gets deeper and deeper into debt every time the cost of electricity rises.

In a world where 0 correlation means no connection whatsoever and 1 means 100% match, the price of electricity should be one of the top economic indicators. But it isn’t, because mainstream economics is totally blind to the indispensable role of energy… If you take a look at the far right side of the graph, though, you can discover the biggest anomaly to our rule of thumb established above so far. Despite the price of power skyrocketing in recent years, the debt to GDP level remained the same… What’s more, it almost got back to pre-pandemic levels! What’s going on? All of a sudden energy price inflation no longer matters? Or debt levels are about to rise significantly — albeit with a slight delay — just as they did during the 1979–1987 crisis?

Well, in order to answer these questions we must first understand what debt really is, and how it ties to inflation. Contrary to a still widely held myth when households and businesses take out a loan from a bank or use their credit and debit cards, the teller does not dip into the savings of others, but creates money out of thin air. As the Bank of England’s website explains (emphasis mine):

“Money is more than banknotes and coins. If you have a bank account, you can use what’s in it to buy things, typically with a debit card. Because you can buy things with your bank account, we think of this as money even though it’s not cash.

Therefore, if you borrow £100 from the bank, and it credits your account with the amount, ‘new money’ has been created. It didn’t exist until it was credited to your account.

This also means as you pay off the loan, the electronic money your bank created is ‘deleted’ — it no longer exists. You haven’t got richer or poorer. You might have less money in your bank account but your debts have gone down too. So essentially, banks create money, not wealth.

Banks create around 80% of money in the economy as electronic deposits in this way. In comparison, banknotes and coins only make up 3%.”

Let me repeat, because it’s very important: it is banks who create 80% of the money circulating in the economy — not the government. (Trust me there are really no printing press machines in the basement of the White House.) Consequently, as the entire economy is just going deeper and deeper into debt, more and more money gets loaned into existence. And what does all that newly minted money do? It goes after the same amount of goods. Therefore whenever there is a sudden increase in debts outstanding inflation is sure to follow.

Let’s take a concrete example. You take out a loan to refurbish your home. As soon as you sign the papers new money gets loaned into existence and gets transferred to your bank account. Right after that you go and visit the local hardware store, order stuff online, maybe hire a contractor or two — in other words: spend almost all of it immediately. This new money supply then spreads across the entire economy: the hardware store uses it to resupply (which then triggers factories to buy raw materials and spend energy), while contractors go out to eat or spend it on goods… And so on and so forth. Your little“ investment project” just gave an immediate boost to the economy. Monthly installments (deducted from your salary), however, take effect very slowly — reducing your future consumption a couple of hundred dollars a time, while erasing the debt in question. In the meantime, and if especially a lot of other people do the same thing, the money supply just keeps on growing and growing with every dollar of debt outstanding added on top of that growing pile.

This is why the FED, together with central banks around the world, believe that they can stifle the growth of the money supply (and therefore “tackle” inflation) by rising interest rates, thereby discouraging spending on credit. As you can see from the chart above, though, their success rate is *ahem* rather low — the pile just seems to be growing, no matter what. Since the practice of raising interest rates has very little effect on the expansion of debts outstanding (and therefore that of the money supply — see the chart above), all these rate hikes achieve is a massive wealth transfer from the average business owner and household to the financier class.

You see, as rates rise, so do mortgage payments, credit card fees and other financial costs — siphoning money away from the productive economy and transferring it into the hands of investors and large banks. So yes, in a way high interest rates kill demand by effectively taxing household and business consumption, but do very little to stop the growth of the money pile seen above. Higher interest rates keep borrowing costs for operational purposes high, leading to higher rates of delinquencies and late fees, while forcing many households and businesses to refinance their loans — that is to replace an old loan with a newer one, thereby perpetuating the problem.

High interest rates, on the other hand, prevent businesses from investing in expanding production — especially if it involves buying new manufacturing equipment, opening a new mine or raising a building. These activities require a high upfront investment which, combined with a higher interest rate, means that businesses must be able to sell their products and services at a comfortably high profit. In our present, depleted state of mineral reserves and ever lower energy returns on energy invested, though, there is very little money to be made on increased production. High interest rates therefore effectively stifle raw material and energy supply growth, with very little delay. The resulting scarcity of economic inputs then makes sure that prices stay elevated, making the problem worse… At least until enough demand is destroyed by stubbornly high prices and high fees paid to banks, that it eventually leads to deflation. But then, it will be already too late to intervene. On a finite planet, with a finite amount of easy (and cheap) to get resources, ballooning debt levels do not signal good times ahead.

The other hidden cost of lending on interest, is interest payments themselves. You see, when banks create money they only create the sum you need, not the one what should be repaid. Taking a quick glance on your mortgage contract reveals the massive size of the problem: by the end of the payback period you often have to return twice or thrice the money you were lent. And where does that not so tiny amount of money comes from? You guessed right: it gets loaned into existence — someone else has to take out a loan, buy your product or service on credit and provide the economy with that oh-so-wanted economic growth.

This banking system of ours is a Ponzi scheme on epic proportions. Any interest rate above 0.0% guarantees that loans (and therefore the money supply) will eventually spiral out of control — except for a debt jubilee, or at least discovering another habitable planet chuck full of resources every once in a while. Other than these two options, debt levels will eventually run out of control — and this is a mathematical certainty, not an opinion. So to answer the questions posed by the departure of energy prices from already too high debt levels: another surge in the debt to GDP ratio seems highly unlikely. If it were to happen, the resulting (hyper-)inflation would kill the economy and “force” central banks to raise interest rates significantly (and thereby kill raw material and energy supply). If debt levels remain the same despite growing energy prices, on the other hand, households and businesses alike will become unable to pay for energy and other critical material inputs, leading to a crash in consumption and quite possibly a combination of deflation and economic decline. Well, damn if you do, damn if you don’t. Honestly, what did we expect? Infinite growth to last forever?

Until next time,

B

Thank you for reading The Honest Sorcerer. If you value this article or any others please share and consider a subscription, or perhaps buying a virtual coffee. At the same time allow me to express my eternal gratitude to those who already support my work — without you this site could not exist.

Notes:

(1) If we take a closer look, we can see that households owed $20.3 trillion (mostly in the form of mortgages and consumer credit) while businesses were indebted to the tune of $21.8 trillion by the beginning of this year. The liabilities of these two sectors taken together was $42.1 trillion, far exceeding government debt at $35.2 trillion.