Global Debt Is Soaring — And We Need To Talk About It

This month, the nasty topic of debt is sneaking up on Washington’s political radar, late.Last week, Treasury Secretary Janet Yellen said Congress Debt cap (Or borrowing limit).

Meanwhile, the Biden administration is facing opposition Aiming to raise taxes on wealthy Americans Pay its estimated $ 3.5 trillion spending plan without adding to its ever-increasing debt.

But in the midst of these domestic financial struggles, a series of amazing series of recommendations from the Institute of International Finance, another corner of Washington, to pay attention to investors, policy makers and citizens as well. The numbers have appeared.

IIF’s “Pandemic Updates” on Global Debt show that Yellen’s latest demands are just one small symbol of a much wider global trend in relentlessly rising borrowing levels. increase. The only thing that is more remarkable than the magnitude of this long-term surge is that there is little public debate about the consequences. This is mainly because voters and investors tend to be distracted by the short-term problems that are occurring in their backyard.

The issue of global debt is the classic field of “social silence”, citing the concept advocated by the French intellectual Pierre Bourdieu. He advocated the concept of problems hidden in obvious vision that we usually ignore because they appear to be slow, technical, or vaguely familiar due to our cultural prejudices. ..

Consider the numbers in this case. The IIF calculates that at the end of the second quarter of 2021, global total debt reached a record $ 296 trillion from $ 270.9 trillion in the previous year. Government, non-financial enterprises, the financial sector and households borrowed $ 86 trillion, $ 86 trillion, $ 69 trillion and $ 55 trillion, respectively.

The good news for those worried about excess debt is that the post-blocking recovery of global growth earlier this year has reduced the ratio of global debt to gross domestic product from a record 362% in March to 353 in June. It was slightly reduced to%.

But the bad news is that when the government embarks on crisis-led fiscal easing, “just” 353 percent is well above the 333 percent level seen before the pandemic. Moreover, at the beginning of 2010, this ratio was close to 300%, but in 2008 it was 280%. Yes, you are reading that right. Global borrowing has increased by more than a third as the world has been hit by a major financial crisis, which has prompted manual work on the dangers of excessive leverage.

Optimists may argue that this is not a problem for three reasons. For Americans, one of the faint comforting details of the IIF data is that most of the recent surge has occurred in China. In the United States, corporate debt has fallen amid economic uncertainty, despite increased government and household debt, which has recently slowed the overall pace of new debt accumulation.

Some observers may think that the second reason they don’t worry is that this surge hasn’t systematically panicked investors. Yes, there are market jitter pockets around China’s real estate sector, for example. However, because central banks keep borrowing costs low, debt repayment costs are also low, making this issue easy to ignore.

A third point for those seeking comfort is that 20th century history shows how debt trends move in both directions. For example, during World War II, Western debt burden exploded to more than 90% of GDP, but has since steadily dropped to less than 30%. As paper Shown by Carmen Reinhart and Verence Blancia. Not surprisingly, policy makers want to tell voters that this will happen again because of high growth and austerity in the future.

But this seems difficult to visualize. The rate of expansion required for countries such as the United States and China to break out of current debt levels is staggering. And, as Reinhardt and Subrancia’s treatises point out, growth wasn’t the only thing that brought about post-WWII miracles. Instead, it was “financial restraint,” or the fact that the government kept interest rates below inflation for years in capital and financial regulation, stealing investors. It can be difficult to repeat that trick in the age of the digital market.

Therefore, we face long-term existential problems. Will the government eventually be forced to unleash ultra-high inflation to reduce its debt? Is there a wide range of debt forgiveness in the future to avoid political or social explosions?It may seem hard to imagine now, but as the deceased anthropologist David Graber explained in his book. Debt, the first 5000 years, Book of Jubilees— Debt forgiveness By Leaders — Occasionally happened in history to avoid social explosions. Or will there be a major default and financial crisis?

Alternatively, in the 21st century, interest rates remain very low, learning to accept spectacular debt numbers as an inevitable consequence of high asset prices, the expansion of the money supply, and the enthusiastic financial system. It may change to an era of ignoring. ?? Does debt feel like an unread email in our inbox to investors and policy makers? It’s a terrifying and huge problem, but is it constant enough to be ignored? We simply don’t know and may not know until the price goes up.

But the fact that our global system is tripled and rising deserves much more debate, even if you’re optimistic about its impact — I’m not.

gillian.tett@ft.com