The rise, and rise, of global debt
There would seem to be no upper limit to the debt that the world’s governments, companies and households can take on, and the global bond markets and banks find a way to accommodate the demand. Does something have to give, eventually?
The US national debt is rising by an estimated $1.9 million per minute, or $32,000 each second, according to the website usdebtclock.org – figures that are easier to grasp than the total sum of more than $34 trillion. The pattern is global, with the total aggregate sum of public, corporate and household debt estimated at $307 trillion by the Institute of International Finance for 2023 – a number too vast to be conceptualized in a tangible sense.
It just keeps on rising. In recent years, there has been an annual negotiation in the US Congress about raising the debt ceiling; each year it has passed, but sometimes with delays resulting in temporary shutdowns of Federal services.
The IIF has reported that global debt surged by more than $15 trillion in the last quarter of 2023, on a year-by-year basis. Much of the increase is in mature markets, including France, the UK, USA and Germany.
Does the global debt burden matter? Many commentators argue that much public sector borrowing is for investment to ensure economic stimulus, and that public sector debt is not like household debt such as a mortgage; it doesn’t have to be repaid in full one day. If it encourages sufficient economic growth, it becomes affordable. This is a valid observation for some contexts, but not helpful for others. According to an analysis by S&P Global, the economic value-add from every additional dollar of debt has been decreasing. A relative measure of the debt burden is its proportion to GDP. If borrowing for investment creates higher economic growth, then the proportion of debt to GDP could fall even as debt rises in absolute terms. The problem is that the proportion has been rising, not falling. It reached 336% by end 2023, according to the IMF.
S&P Global put an even higher figure for global debt-to-GDP of 349% in 2023, some 26% higher than the pre-global financial crisis figure of 278% in 2007. It rose sharply in 2020 owing to the Covid-19 pandemic, and has stayed at elevated levels. The public sector proportion rose from 58% in 2007 to 102% in 2022, the same level as at the peak of the pandemic two years earlier.
Explanatory factors for higher public debt include increased defence spending owing to conflict and geopolitical tension, and social spending to ease cost-of-living problems. Rising inflation has prompted increases in interest rates, which increase the cost of debt – S&P Global gives an estimate of an additional burden of $3 trillion on servicing debt, owing to interest rate rises in 2022-2023. The Economist has estimated that the USA is projected to be spending more on debt servicing than on defence by 2028.
Around 100 countries will have to reduce spending on health, education and social protection owing to the cost of servicing debt, according to the IMF. For companies, high debt repayments hamper the ability to invest, while for households they can impair quality of life.
If the debt trajectory rises, or threatens to rise, to levels perceived as unsustainable by those willing to lend money to a state, then confidence collapses akin to a run on a bank, and the state hits crisis, with austerity and high unemployment to follow. This occurred in Argentina in 2001, and in Greece in 2009-10.
More than half of low-income countries are at significant risk of debt distress, and about one fifth of sovereign bonds are trading at distressed levels, according to the IMF.
So debt levels do matter, and there are upper limits; the complication is that the issue rests on intangible matters such as confidence, as well as the hard data. Unexpected events, such as the Covid-19 pandemic, the conflict in Ukraine, and rising inflation, can cause demand for expenditure – and consequent borrowing especially by governments – to rise even from already elevated levels.
There are no easy routes out of the problem, but a viable route does have to be found. The current trajectory is not sustainable. A hard default in a major economy, a member of the G7, for example, is uncharted territory. As President Milei in Argentina is discovering, curbing public spending can cause serious protests. Most probably, governments will find a way to muddle through, tolerating a higher inflation rate, increasing spending by less than this rate and trying to become smarter in encouraging growth. But geopolitical upsets and populist movements could derail a pragmatic approach.