Is the world in danger of drowning in debt?
The International Monetary Fund this month issued a report highlighting its concerns about worldwide debt, which it said totals some $152 trillion. “The period of high government debt ratios is here to stay, despite efforts by countries to stabilize the debt following the 2008 financial crisis,” said Victor Gaspar, director of the IMF’s Fiscal Affairs Department.
In fact, since 2007, global debt has grown by $57 trillion, according to the IMF report. The following are particularly worrisome developments:
¦ Ongoing, high levels of government debt in advanced economies.
¦ Increasing household debt relative to household income.
¦ Quadrupling of China’s debt in the last seven years, according to the McKinsey Report by the global consulting firm.
¦ Every advanced economy currently has higher levels of borrowing relative to gross domestic product than in 2007.
¦ As of 2015, the debt mountain represented 225 percent of gross domestic product, up from 200 percent in 2002.
¦ Approximately two-thirds of the world’s debt is private and one-third is government debt.
Why worry about high debt loads?
A high debt load impairs the ability of governments to use fiscal and monetary policies to stimulate their economies. The threat of default either by sovereign entities or private corporations undermines global growth and financial stability in today’s interconnected world.
There is no exact science to precisely predict when global debt levels become dangerous. That said, some countries have such high debt that the IMF has urged these governments, particularly Brazil and China, to tackle the excessive debt in their private sectors. The IMF is particularly worried that declining price levels, known as deflation, are increasing the real debt burden and therefore reducing countries’ ability to grow economically. Stated differently, declining overall price levels reduce borrowers’ revenues with which to repay their obligations.
Only a handful of countries or private companies can refinance their debt loads at any time. Countries and private industries could lose their access to the credit markets because of unexpected shocks to the system, such as a precipitous drop in commodity prices or the insolvency of “too-big-to-fail” institutions. The ensuing financial disruptions caused by financial illiquidity can be contagious, leading to a freezing of the credit markets and/or skyrocketing unemployment.
An old Wall Street maxim to debtors remains valid: “Finance when you can, not when you have to.”
In recent weeks, the financial press has highlighted several concerns regarding the financial solvency of European banks and state-owned enterprises in China. Deutsche Bank has become the poster child for liquidity problems. Because Deutsche Bank is Germany’s largest, its financial difficulties could have global repercussions.
On the other side of the globe, in China, the Financial Times recently estimated that its debt is 249 percent of gross national product. The largest share of China’s debt is soft loans to state-owned enterprises, which represent about half of China’s economy. Unlike their private companies, Chinese state-owned enterprises are inefficient and their workforces are bloated.
What are possible short-term fixes to the global debt glut? The reduction of government debt would require controversial remedies. For example, governments might consider significant asset sales, across-the-board tax increases and reduced government spending.
Frankly, the scant attention to the IMF report on global debt is distressing because we need to recognize that continued deficits are not sustainable and will undermine global growth.
Slow growth, in turn, means an inability to raise world living standards; servicing global debt levels diverts money from needed infrastructure programs, capital expenditures, improved social services and national defense. This can lead to continued social unrest and massive migration.
Originally published in the Sarasota Herald-Tribune
