One way of measuring global policy-makers’ concerns about the unprecedented increase in debt around the world is the number of times the subject is raised at high-level conferences. And it comes up practically every week, most recently when Kristalina Georgieva, managing director of the International Monetary Fund, told the Atlantic Council in April about her fears that the current decade could be remembered as “the turbulent 20s.”

While prefacing her remarks with observations about some of the things to be thankful for, notably falling inflation, she got onto the urgencies; “The sobering reality is global economic activity is weak by historical standards. Prospects for growth have been slowing since the global financial crisis. Inflation is not fully defeated. Fiscal buffers have been depleted. And debt is up, posing a major challenge to public finances in many countries.”

Debt, the main subject of this article, is certainly up. The numbers ring alarm bells. In the so-called OECD area covering 38 member nations, gross borrowing jumped by exactly $2trn in 2023, from $12.1–$14.1trn. It will get worse; in 2024 the OECD predicts a further increase of $1.7trn. Although the US was the chief culprit, borrowing nearly two thirds of 2023’s $14.1trn, it clearly puts pressure on the global debt markets, whose capacity to issue debt is not infinite.

Overall, the markets are awash with debt. The total borrowings – technically ‘outstanding marketable debt’ – of the 38 governments is expected to hit $56trn in 2024. If that is a thought-provoking figure, consider that it will have increased by $16trn in just the last five years. Needless to say, that will be a record.

Perhaps more disturbing, the average debt-to-GDP ratio is also off the scale. In real pre-inflation terms it is up from a pre-Covid 73 percent to about 83 percent in 2023. And it’s certain to rise higher by the time 2024 is out. In the meantime, the cost of new borrowing is rising, with interest rates approaching three percent of GDP.

More trillions
Emerging markets are taking a beating. In the so-called EMDEs (emerging market and developing economy) nations, in 2023 alone nearly an extra $1trn of sovereign bonds were issued, now up to $3.9trn. Although it can hardly be called an EMDE, China has a voracious and rapidly growing appetite for this kind of debt. In 2021 its share of emerging nations’ bonds was 15 percent; now it is 37 percent. That is a number that is sowing alarm among many issuers inside and out of China.

Unsurprisingly, as EMDEs borrow more against less – because their economies are not growing fast enough – the credit ratings are deteriorating with a commensurate increase in the cost of debt. In the category of low-income and lower-middle-income countries, which counts some 130 nations with average per capita GDP of $12,300, there were no less than 24 downgrades against six upgrades, reports the OECD.

The unhappy result is that outstanding sovereign debt has been pushed to unprecedented levels. Although these ratios look better when inflation and longer repayment times are taken into account, the debt still has to be repaid. For many nations it is a ticking time bomb.

It is not just the volume of debt that matters but also its composition. As the OECD explains in its annual review of global debt, the US, the world’s biggest economy, faces the prospect of renewing no less than a third of government debt during 2024. That is a small matter of $11.3trn. No doubt the US Treasury will handle the task but, as the Peter G. Peterson Foundation, an economic ginger group, points out, that is equivalent to nearly $103,000 for every single American.

America’s debt burden has been growing for years; “a mis-match between spending and revenues,” summarises the foundation, citing the cost of an ageing population, underfunded services and other long-term contributory reasons. At least the US can carry its debt. “In emerging markets decisions on debt composition become even more intricate,” notes the OECD. This is because they have to navigate growing volatility, or what the Paris-based body describes as “exposure to fluctuations in global risk sentiment in an increasingly shock-prone world.”

Another policy-maker to voice her concerns – frequently, in fact – is Indian-American economist Gita Gopinath, the IMF’s deputy managing director. In late 2023 at a conference in Washington entitled ‘Fiscal Policy in an Era of High Debt’, Gopinath cited alarming figures about the long-run – and accelerating – growth in public debt levels. “Since the mid-1970s, global public debt has tripled to reach 92 percent of GDP by the end of 2022. So, debt levels had been rising for some time.”

Albeit in sober economic terms Gopinath painted a bleak picture, especially for economically weaker nations; “Rising deficits and debts in countries such as the US have serious ramifications for emerging and developing economies, who are hit by rising rates and weaker currencies. And many economies, particularly low-income countries, are already in debt distress.”

“The combination of record-high global debt levels, higher for longer interest rates, and weak growth prospects poses a triple challenge for policymakers. In a shock-prone world, very few countries will have the fiscal space to support their economies,” Gopinath continued.

Fracturing fiscal rules
So there is a mounting problem. One of the many complexities of reducing global debt is that the old, more comfortable rules have been broken for several reasons. One is the 2008 global financial crisis (GFC) that overnight brought unprecedented levels of quantitative easing – central banks printing money and lending it at rock-bottom rates to the financial sector to prop them up.

Another is that while most nations have their own fiscal rules, they find it increasingly hard to stick to them and resort to issuing more debt to keep the economy moving. “Deviations from the rules are frequent,” regrets the OECD. “Few have contained debt since the GFC.”

The OECD’s solution is more discipline buttressed by a kind of fiscal police. “We need rules that respond to shocks but with clear mechanisms to correct for non-compliance and that are anchored on spending targets,” it suggests. “Independent fiscal councils can also enhance checks and balances.”

Meanwhile others see the need for a new kind of economics. “Dependence on credit to boost demand imperils the world economy, so we must correct the underlying imbalances,” warns Atif Mian, professor of economics, public policy and finance at Princeton University. In an article in the prestigious Finance & Development magazine, he goes on to call for a “long-term balance between what people earn and what they spend.” Until then though, we have what he calls “a massive debt supercycle that threatens the global economy. Breaking that cycle is one of the most pressing challenges of the 21st century.”

Before that can happen though, habits have to change. Led by largely thriving economies such as the US, government (or sovereign) borrowing has become almost obligatory. And when governments such as Britain sought to reduce its debt in the wake of the GFC, it was widely lambasted for ‘austerity economics’ by citizens who expected continuing largesse from a nation that could ill afford it. France repeatedly runs into the same problems – in fact riotous protests – when the Macron government attempts to follow other nations and slowly increase the age for pension payments, which are steadily undermining the entire economy.

Debt build-up
Debt sprees have been on the rise for well over half a century, starting around the time that the miseries of the great depression began to fade. For example, in the US total debt stood at about 140 percent of GDP between 1960 and 1980, but has since more than doubled to 300 percent of GDP (see Fig 1). And the world has learned from the American example.

As Professor Mian explains; “Not even the great recession of 2008 [the result of the GFC], which in many ways was a result of the excesses of borrowing, could put a dent in debt’s relentless upward march. It would be a mistake to think that 2008 reflected merely some unfortunate policy misstep. The build-up in debt that led to the 2008 crisis stemmed from deep structural imbalances in the economy. Those imbalances persist, as do the dangers associated with them.”

But where does all this debt and dangerous imbalance come from? Most researchers agree that, paradoxically, it derives from a glut of savings by rich people and rich countries. There is no doubt that the rich are getting richer, as in fact they generally have in historical terms. The top one percent of individuals have been accumulating more and more wealth for more than 40 years, many of them by capitalising on the digital boom. And so have certain countries got richer, notably China, whose rising prosperity ends up in domestic banks and other savings institutions much more than in wealthy western countries. Between them, they claim a disproportionately greater share of global income, which in turn creates financial surpluses that fuel the ‘global debt supercycle.’

Unfortunately, much of this avalanche of debt is ending up in the wrong place because the financial sector – the man in the middle – has been missing its targets. Professor Mian continues; “A well-functioning financial sector would channel the financial surpluses toward productive investments, such as building and maintaining infrastructure and developing technology. Any debt resulting from such productive lending would naturally be sustainable, because returns from investment would pay it off.”

Mian adds; “Unfortunately, a key feature of the debt supercycle is its failure to finance productive investment. For example, even though total debt as a share of GDP has more than doubled, real investment as a share of GDP has remained stagnant, or even fallen over the past four decades.” The alarming conclusion is that around half of the trillions of new debt issued during the past two years is being wasted. Instead of financing investment, which would help create wealth, it has gone to the debt unproductive consumption by households and governments.

Naturally, collapsing interest rates only feed this cycle. Those with long memories will know that in the early 1980s, the US 10-year real interest rate hovered around seven percent. More recently, it’s plummeted as low as below zero. As these rates flow into consumer finance, it prompts ordinary people to spend rather than save.

Crisis management
Behind the scenes, almost oblivious to the general public, there have been debt-related crises.

As the custodians of financial stability, central banks have had to manage upheavals in the rapidly growing non-bank financial sector that could easily have spread more widely with dire consequences. Only adroit and largely anonymous crisis management avoided the worst.

“These [non-bank] institutions have grown in significance across a range of markets, including those that households, businesses and governments use to borrow, save or access financial services,” explains the Bank of England’s Nick Butt, head of the future balance sheet unit, in a recent speech. Pretty much from a standing start, in 20 years Britain’s non-banks have snapped up roughly half of all UK’s financial assets including corporate lending. Other European countries have seen the same developments in what amounts to yet another threat to financial stability.

Why? Because non-banks in Britain, but also elsewhere, are big holders of gilts (sovereign bonds) and routinely resort to the gilt repo market. Although its workings are little known outside financial circles, this is where the Bank of England buys and sells gilt-edged securities. Established in 1996, it is a huge market where billions are transacted every day for the purposes of keeping the banking system liquid. Echoing what other central banks are saying, Butt notes; “The implications of the rise of the non-banks are far from theoretical and have given rise to new vulnerabilities and sources of liquidity risk that have all too real a potential to cause financial instability and impact the broader economy.”

Some might say more actual than potential. In March 2020 the state of the UK government’s bond markets deteriorated rapidly in a general rush for short-dated, cash-like instruments in the middle of the Covid lockdowns. There was a dash for cash right through the financial sector as banks of all types sought to meet their own liquidity obligations. The big dealer banks pumped in around £50bn through the gilt market to help out the central bank but, in a demonstration of the nervousness lurking beneath a highly indebted market, it was barely enough.

A key feature of the debt supercycle is its failure to finance productive investment

The money markets held their breath but got through it. Another crisis in Britain two years later in the immediate aftermath of short-lived prime minister Liz Truss’ shock ‘go-for-growth’ economic policy hit the long-dated gilt market in particular, once again exposing what Butt called “vulnerabilities in liability-driven investment funds” that posed a threat to the country’s financial stability.

It is all about liquidity, especially when the non-banks get the dreaded margin call as their own creditors hear the alarm bells. Right now, central banks and global regulators are working hard on plugging these holes before they get too big. As recently as 20 years ago, life was easier for the likes of the Bank of England, the US Federal Reserve and other major institutions when they had only to worry about the big retail and investment banks. And when global debt levels were not so high.

Better big banks
On the bright side, most of the world’s big, systemic banks are safer than they were before the GFC. Following the lending excesses exposed by that crisis, they hold more capital – the funds that stand first in line to bear losses – and are in a better position to protect depositors. Most countries have enforced these regulations developed by the Bank for International Settlements, albeit with local variations, and global regulators are breathing much more easily about the giants of the financial sector.

Reforms are continuing, currently through what is known as Basel 3.1. As Bank of England governor Andrew Bailey explains, “the key thing here is that across jurisdictions it is implemented faithfully, neither more nor less.” This doesn’t necessarily mean in a highly illiquid world that the threat of bank failures has been extinguished. In early 2023 alone the US, supposedly the bastion of regulation, saw three failures – Silicon Valley Bank, Signature Bank and First Republic – while Switzerland’s once-mighty Credit Suisse had to be rescued before it collapsed. Following a mire of shoddy regulation and inept management, the Swiss government arranged for rival UBS to buy the failed institution for $3.25bn, a transaction completed in June 2023.

It’s not just the volume of debt that matters but also its composition

There are concerns that social media will contribute to the risk of bank failures through a much-feared run. “The sudden withdrawal of bank deposits – accelerated by digital technology – contributed to the failures of these banks,” notes a thought-provoking study by leading European bankers, citing the speed at which news travels, even if it is wrong. This was not the case even during the disastrous bank runs leading up to the GFC when, the study argues, “social media and mobile banking apps were unheard of or barely existed.”

As they conclude; “As events in 2023 illustrate, the risk of sudden bank runs may generally be affected by advancing digital frontiers in banking.” In short, something else for regulators to worry about.

Crypto craziness
They were certainly worried by the lemming-like race for alternative currencies that was symbolised by the collapse in November 2022 of Sam Bankman-Fried’s cryptocurrency exchange FTX and its affiliated hedge fund, Alameda Research. The exchange folded in days after clients learned that Alameda’s losing bets were being covered by the customers of FTX, unbeknownst to themselves.

In a salutary lesson for proponents of ‘metaverse’ currencies, Bankman-Fried has been sentenced to 25 years in prison and ordered to repay over $11bn. Long before FTX went under, central bankers had been warning against plunging into this wild and unregulated market. However the subsequent flight from crypto currencies does not spell their end. Central bankers see a lot of sense in alternative forms of payment and many are developing them. But they will be run under strict controls and regulations.

So what now?
The tight-rope act requires that global debt be steadily reduced and that it is invested much more wisely – that is, in the corners of the economy that will create the right kind of growth. Most economists continue to favour GDP, albeit a more enlightened and nuanced version that focuses on what is good for people and the planet. Good growth, in short. Some, however, argue that growth – and especially the debt-funded version – has passed its time. The ‘de-growth lobby,’ whose figurehead is Greta Thunberg, argues that modern capitalism has got it wrong by focusing on GDP and that living standards are already good enough.

Few outside academic circles buy that argument because ‘good growth’ improves lives. However, as the IMF’s latest World Happiness Report, the 10th iteration of this enlightening study, shows, economic growth isn’t everything. In fact, some of the poorer nations are the happiest.

“When we juxtapose GDP per capita with happiness scores from the report, it becomes clear that while GDP per capita is a significant predictor of happiness, it is not the only factor. As the report outlines, other variables, such as social support, life expectancy, freedom, generosity, and the absence of corruption, also help explain varying levels of happiness between countries,” said the IMF report.

In short, behaviour as well as GDP. This is why Costa Rica, famous for its economic concept of la pura vida, which seeks to take everybody’s wellbeing into account, ranks a high 6.61 on the Happiness Index with a GDP per capita of just $20,000 while extremely prosperous Singapore ranks just below. Strikingly, poor nations like Kosovo (6.37 at $11,690), Nicaragua (6.26 at $5,842) and Guatemala (6.15 at $8,262) rank just below Singapore. However it is unlikely that lowest-ranked Afghanistan (1.86) and Lebanon (2.39) would line up behind the de-growth champions.

The IMF’s Gopinath, a strategic thinker, sounds a warning to high-borrowing, spendthrift nations. “In today’s environment – where it is politically difficult to cut spending or raise taxes – debt-financed spending may still seem tempting. But that would be a grave mistake, setting debt on an unsustainable trajectory as borrowing costs rise sharply. Governments need to rethink what they can and cannot do. They cannot be the insurer of first resort for all shocks. Revenues also need to keep up with spending,” Gopinath said.

Overall it appears to come down to living within your means.