The World is Buried in Debt

Global debt increased by more than $10 trillion last year, sending debt spiraling to a soaring $255 trillion. This figure includes household, corporate, and government borrowing. The debt-to-GDP has topped 322 percent. And we are still facing an unprecedented pandemic, which will undoubtedly toss global debt into a whirlwind.

Will the world be able to recover from its current debt?

Half of this global debt has been accumulated by first world countries, such as the United States and Europe. Norway and Switzerland have a large increase in household debts, while government debts in the United States and Australia have skyrocketed to new heights.

The level of debt in emerging markets is at $72 trillion but is rising at a steady rate.

The highest debt to GDP ratio belongs to China and is at 310 percent.

With interest rates near zero in many countries and borrowing encouraged, the first quarter of 2020 global debt is expected to exceed $257 trillion. Nineteen trillion dollars of bonds are expected to mature this year, and it is assumed that not all of these will be repaid. Global debts are likely to reach new and dangerous levels.

Meeting climate change goals, one of the United Nations’ Sustainable Development Goals, will add $42 trillion to the global debt. The World Bank has pointed out that low-interest rates alone are not enough to accomplish these goals and prevent a global financial crash.

Historically, this is the fourth wave of soaring global debt. None of the prior three ended well.

  1. The first wave occurred in the 70s and 80s, when third world countries in Latin America and Africa borrowed and created debts which turned into crises in the 1980s.
  2. The second wave happened in the late 1990s through the early 2000s, when East Asian, Central Asian, and European countries took on too much debt and set of financial crises through 2001.
  3. The third wave of overwhelming debt is the financial crisis of 2007, which began a serious global recession.
  4. The current wave of debt increases began in 2010 and is the largest in half a century.

These periods of heavy borrowing and high debt all began with low-interest rates, easy borrowing, and a lack of capital inflows. The results showed a sharp decrease in the growth of GDP.

Can financial policymakers avoid the mistakes of the three previous debt waves? Financial risks must be minimized. The World Bank can institute policies that will strengthen exchange rates and minimize borrowing, which will only increase the current debt.

Of course, none of these numbers consider the devastating effect of the Coronavirus on global debt. Almost every country will incur unprecedented debt to deal with this virus.

According to the International Monetary Fund, an initial $8 trillion in loans will be needed to help the global economies recover. But that is just the beginning.