Digital Beans #29 What does high debt/GDP ratio of economies tell us?

Hey there everyone! 👋 This is Shivam. I bring to you the 29th weekly edition of Digital Beans. This is an effort through which I try to share my thoughts on the Digital Assets Industry and Business Models in the space. Your 0 to 1 guide for Digital Assets Industry

Read time - 4 mins

In this edition, the article I explore is titled "What does high debt/GDP ratio of economies tell us? " Hope you enjoy it.

Spill the beans (Explain to me like a 5 year old) 

Higher debt means higher interest payments in future

With high debt to GDP ratio, this could become a problem. These percentages eat more into the GDP growth that can go towards reinvesting in the economy

1} Interest payments are becoming a big percentage of GDP growth, With high debt, the writing is on the wall, "Debasement" or "QE"

Before I double click into this narrative, I would like to take few seconds to talk about debt to GDP ratio,

A debt-to-GDP ratio is an indicator of how much a debt a country owes and how much it produces to pay off its debts. Expressed in percentages, it is alternatively interpreted as the number of years needed in paying back the debt, in case the entire GDP has been allocated for debt repayment. Have a look here (2021 data)

High Debt/GDP ratio is an indication of the health of an economy, what it means is this:

High ratio - "Fat economy" which will have issues (Japan and US for instance)

Low ratio - "Lean economy" which is best positioned to grow (India, SE Asia)

2} Let’s look into the GDP side of things, the numerator GDP growth is basically a simple formula

GDP Growth = Population growth + Productivity growth + Debt growth

When you think of these 3 factors, let's take a look at what is happening

1} Population growth:

Most of the Western world, plus China, are seeing shrinking populations, population growth is "down or flattened". India on the other hand has been growing which is a good sign for the times to come

2} Productivity growth:

It's been declining for a very long time now, its a slow and steady downward trend. AI is on the verge of making that change but it might take some time

And so we have,

1. A declining productivity

2. Either declining population or slowed down population growth

The third piece of the puzzle then is:

3} Debt growth:

Debt growth robs the future to create current growth. Interestingly we all know Debt growth has reached high limits now for most of the countries esp. the developed nations. They have been printing money endlessly in the last few years and the paychecks are coming due.

3} With high debt comes high interest payments that eat into the revenues

Part of GDP goes into servicing debt, so GDP growth is financing debt payments. To understand this,

When a government gets to 100% of GDP in debt and the trend rate of GDP is, let's say, 2%, and interest rates are at 2%, then 100% of GDP growth goes to paying interest.

With the interest payments that keep growing, the central banks may need to monetize the interest payments or the economy compounds negative forever

This leads to something interesting huge - “The debasement of currency”. This means you're basically borrowing money to pay off the interest on the other money

What it does is that optically makes assets go up in price. Because it's actually the denominator that's falling, and not the asset prices that are increasing. So gives the false impressions that assets are increasing in value but that is not the case. Check out my post on Venezuelan economy for what it means.

4} So, is there a solution?

Well -Holding assets can help you store your wealth. But growing it is going to be difficult, for that you need to look into technology

Tech stocks are one way. Bitcoin is another.

Its the way out

State of Crypto affairs - A quick look at the market 

The global cryptocurrency market cap today: $1.22 Trillion

Weekly change: -1.48% | Yearly change: 22.62%

Bitcoin (BTC) is the largest cryptocurrency with a market cap of $589 Billion.

Weekly change: -0.72% | YTD change: 82.24%

Another important metric is Bitcoin dominance which can be used as a rough indicator of the relative strength of Bitcoin versus other cryptocurrencies. A high Bitcoin dominance means that Bitcoin has a large market share and is potentially more influential in the overall cryptocurrency market and vice-versa.

Bitcoin dominance: Current Year: 49.90% | Last year (July 2022): 42.50%

Greed and fear index 

The market sentiment has been back to high greed levels now post Bitcoin pumping in the last week as the likes of Blackrock filed for Bitcoin Spot ETF (bullish news)

Note: The data used is based on metrics like Volatility, Surveys, Bitcoin Dominance, Social and Google Trends. Source: Coinstats

ETH as an ultrasound money narrative! 

Let's have a look at Ethereum supply changes post its merge to a PoS blockchain from PoW.

The significance of the charts - understand how the supply of Ethereum is decreasing post the merge, which means “deflationary economics” for the Blockchain

Supply change since merge POS -289,969 ETH

The graph highlights POS vs POW issuance since the merge. Impressive numbers, look super bullish for ETH long term given the supply of ETH is not growing as before

What's brewing today? Bringing fresh beans to you: 

BlackRock CEO Larry Fink Says Bitcoin Could ‘Revolutionize Finance’ The asset management giant in mid-June filed paperwork with the SEC for a spot bitcoin ETF

The Real Use Case for CBDCs: Dethroning the Dollar Central bank digital currencies will revolutionize how companies settle international trade and reduce the need for greenbacks in the world economy, says Michael Casey

AI Can Now Move Bitcoin With New Lightning Labs Tools Large Language Models (LLM) like ChatGPT will now be able to hold, receive and send Bitcoin via the Lightning Network.

Whats meme-ing? Better make sure this is fun

And now the funny part,

“First they ignore you, then they fight you and finally accept you”

What did you think of today's edition?  

Reach out to me on Twitter or LinkedIn for any feedback :)

DISCLAIMER: None of this is financial advice. This newsletter is strictly educational and is not investment advice or a solicitation to buy or sell any assets or to make any financial decisions. Please be careful and do your own research