Have you heard the news? The stock market has started to collapse and all the various news outlets are speculating about what’s going on and why this is happening all of a sudden.

Many of the major news sites are talking about a company called Glencore and how it could be the next Lehman Brothers, in that it’s the first mining company to go bust, which then causes the other mining companies to struggle to refinance their debt, which in turn leads to some of the more unhealthy companies going bust, which then further unsettles banks and retirement funds and we have another GFC style event.

I’m not going to speculate on whether this assessment is right or wrong, because ultimately it doesn’t matter. The true reason why everything is looking, well, wobbly – is because of debt and a lack of any “real” growth. You’ll see I’ve highlighted the word real, and that’s because the majority of the growth we’ve experienced is due to central banks around the world doing things like quantitative easing, which is just a fancy way of saying – handing out money – normally to banks.

Why do central banks need to do this?

Because there is so much debt on the books of public and private companies, households, students and governments that there isn’t enough money to go around to create any “real” growth. Most of the money that is available is being used to pay back debt and the interest it is accruing everyday.

The government wants you to start a business, create new jobs and sell things to other countries so that they can run an account surplus. This surplus is then used to pay off debt and reinvest into new assets. In the past a great way to do this was to borrow in the short term, invest in productive assets and then the gains would pay off the debt in the long term.

Unfortunately we’ve got to a point where there is now just too much debt everywhere, that the only thing central banks can do is lower interest rates in an attempt to ease the debt burden. It may even get to a point where they implement negative interest rates, where you will pay the bank to hold your money, rather than them pay you interest.