GLOBAL DEBT

Global debt has reached a staggering $307 trillion by the end of June 2023, marking a significant milestone in the world's financial landscape according to the Institute of International Finance (IIF). Over the past decade, global debt has surged by a staggering $100 trillion, raising concerns about its implications for the global economy.

2. About Global Debt

Global debt encompasses the borrowings of governments, private businesses, and individuals. Governments often resort to borrowing to cover various expenses that cannot be funded through tax revenue alone, including interest payments on previous debts. In contrast, the private sector primarily borrows to make investments.

3. The Factors Behind Rising Global Debt

• Both nominal global debt and its share relative to Gross Domestic Product (GDP) have been on an upward trajectory for decades.
• The COVID-19 pandemic temporarily halted this trend due to sluggish economic activity and reduced lending.
• However, global debt levels have recently started to climb once more.
• Most notably, advanced economies, including the United States, the United Kingdom, Japan, and France, account for over 80% of the increase in global debt during the first half of 2023.
• Among emerging market economies, China, India, and Brazil have witnessed substantial growth in debt.
• Surprisingly, this surge in debt comes amid rising interest rates, which would typically dampen demand for loans.

4. The Significance of Rising Debt Levels

• It's crucial to recognize that a gradual increase in debt levels is not inherently problematic.
• As the total money supply in economies steadily expands each year, higher debt levels often accompany this growth.
• This phenomenon can result from increased savings channelled into investments, which is a sign of a healthy economy.
• More noteworthy than the increase in global debt is the seven consecutive quarters of declining debt-to-GDP ratios leading up to 2023.
• The Institute of International Finance (IIF) attributes this decline to rising price inflation, which effectively reduces the real value of debts denominated in local currencies.
• This "inflating away" of debt occurs when central banks create fresh currency to pay off government debt by purchasing government bonds, ultimately leading to increased prices and an indirect economic tax.

5. Causes for Concern

• Rising global debt levels understandably raise concerns about the sustainability of this debt burden, particularly in the case of government debt.
• Governments often engage in reckless borrowing to fund populist programs, which can lead to rapidly increasing debt.
• Additionally, when central banks raise interest rates, servicing the existing debt becomes more challenging for governments with heavy debt loads.
• While low interest rates have kept government debt servicing manageable over the past decade, the recent move by central banks to raise interest rates, primarily to combat inflation, signals a change.
• This shift could intensify pressure on governments, potentially pushing them toward either default or inflation to reduce their debt burden.
• Many analysts believe that inflating away debt may be the only feasible solution for some governments to avoid an outright default.
• The Institute of International Finance (IIF) has sounded a warning about the global financial infrastructure's inability to handle unsustainable domestic debt levels.
• This underscores the gravity of the situation and the potential systemic risks associated with soaring global debt.

6. Private Debt and Economic Booms

• Rapidly rising private debt levels also draw scrutiny from analysts, as they often indicate unsustainable economic booms.
• When such lending is not backed by genuine savings, it can lead to economic crises, as exemplified by the 2008 global financial crisis, which followed an economic boom fueled by the U.S. Federal Reserve's easy credit policy.

7. Conclusion

The global debt situation is a complex and pressing issue, with significant implications for the world economy. Understanding its various facets is essential for policymakers, economists, and the public at large.