Global debt has taken a dramatic turn this year, burgeoning to an eye-watering estimate of $315 trillion, as reported by the International Monetary Fund (IMF). This striking development serves as a testament to increased borrowing for numerous countries around the globe and a staggering indicator of the current state of our international economy.
To fully grasp the implications of this situation, let’s start by examining the genesis of this issue. Prior to the 2008 Financial Crash, the world was already dealing with significant debt. Nevertheless, the event significantly exacerbated the issue, pushing debt into what has been perceived as an unstoppable forward trajectory. The response to the crisis involved the dropping of interest rates and boosting of liquidity by central banks around the world, a strategy intended to stimulate economic growth.
This drive to promote economic activity resulted in corporations, financial institutions, and governments falling into a loaning frenzy, provoking an extraordinary surge in global debt. The international monetary system slashed rates to essentially zero, leading several investors to borrow in order to capitalize on cheap credit.
Fast forward to the present, such actions are having an escalating ripple effect on the economy. With emerging markets and developing economies, including China, accounting for the majority of this increase, the situation has raised eyebrows about the ability of these countries to manage their loans.
As it stands, global debt is now three times larger than the world’s annual economic output – or GDP. This precipitous rise indicates an economic paradox, wherein low-interest rates inspiring increased borrowing also cause a surge in the global debt.
The corporate sector, particularly in the United States, has also seen a significant increase in borrowing. Companies have taken advantage of incredibly low borrowing costs to finance their operations or to invest in growth opportunities. While this can potentially drive economic growth, it also raises concerns about the stability of corporate debt markets in the face of a potential economic downturn.
In addition, countries with high public debt are in uncharted territory. Countries like Italy and Greece have previously dealt with high public debt, and the repercussions were severe, including austerity measures and recession. Increasing public debt might stimulate economic growth in the short term, but the long-term effects are usually detrimental.
Moreover, global debt growth raises concerns about future economic growth. Economists caution that high levels of debt could slow economic development as countries and businesses could potentially have more debt than they can feasibly repay, leading to potential defaults.
The implications of this rising trend in global debt are significant and complex. While debt can be a useful tool for countries to invest in stimulating their economy, and corporations leveraging it to capitalize on business opportunities, it also presents a sizeable risk if not managed carefully. As the global economy continues to grapple with this ever-growing debt figure, it highlights the delicate balance that needs to be struck between generating economic activity and maintaining financial stability.
Sources:
Global debt has grown to $315 trillion this year: here’s how we got here. Godzilla Newz. Accessed 2021.
International Monetary Fund (IMF) Reports. Accessed 2021.