This month the thorny topic of debt is creeping back, belatedly, on to the political radar in Washington. Last week Janet Yellen, Treasury secretary, warned that the US government will run out of money in October unless Congress raises the debt ceiling (or borrowing limit).
Meanwhile the Biden administration is facing opposition as it seeks to hike taxes on wealthy Americans to pay for its putative $3.5tn spending plan, without adding to that ever-swelling debt.
Yet amid these domestic fiscal fights, an alarming set of numbers has just emerged from another corner of Washington — the Institute of International Finance, a banking body — which investors, policymakers and citizens would be well advised to take notice of as well.
The IIF’s “pandemic update” on global debt shows the degree to which Yellen’s latest request is just one tiny symbol of a much wider global trend of inexorably rising borrowing levels. The only thing more remarkable than the size of this longer term surge is that there is so little public debate about its consequences, largely because voters and investors tend to be distracted by short-term issues happening in their own backyards.
The issue of global debt is a classic area of “social silence”, to cite the concept posited by the French intellectual Pierre Bourdieu. He put forward the notion of an issue hidden in plain sight that we usually ignore because it seems slow-moving, technical or vaguely familiar due to our cultural biases.
Consider the numbers in this case. The IIF calculates that total global debt hit a record $296tn at the end of the second quarter of 2021, up from $270.9tn a year earlier. Government, non-financial corporate, financial sector and household borrowing represented, $86tn, $86tn, $69tn and $55tn respectively.
The good news for anyone worried about excess debt was that a post-lockdown rebound in global growth earlier this year caused the ratio of global debt to gross domestic product to dip slightly from a record 362 per cent in March to 353 per cent in June.
However, the bad news is that “just” 353 per cent is much higher than the 333 per cent level seen before the pandemic, when governments embarked on crisis-driven fiscal loosening. Moreover, at the start of the decade, the ratio was near to 300 per cent — and in 2008 it was 280 per cent. Yes, you read that right: since the world suffered the Great Financial Crisis, which prompted hand-wringing about the dangers of excessive leverage, global borrowing has grown by more than a third.
An optimist might argue that this does not matter, for three reasons. For Americans, one faintly comforting detail of the IIF data is that a large part of the recent surge has occurred in China. In the US, the pace of overall new debt accumulation slowed recently because corporate borrowing dipped amid economic uncertainty, even as government and household debt grew.
A second reason not to worry, some observers might think, is that this surge has not yet caused investors to panic in a systemic way. Yes, there are pockets of market jitters, for example around the Chinese property sector. But since central banks have kept borrowing costs low, debt servicing costs are low too, which makes the issue easier to ignore.
A third point for those looking for comfort is that 20th-century history shows how debt trends can move both ways. Western debt burdens exploded to over 90 per cent of GDP during the second world war, for example, but then steadily dropped to below 30 per cent, as a paper from Carmen Reinhart and Belen Sbrancia has shown. Unsurprisingly, policymakers like to tell voters this will happen again, due to high future growth and austerity.
However this seems hard to visualise. The rate of expansion that countries such as America, or China, would need to grow their way out of their current debt levels is mind-boggling. And as Reinhart and Sbrancia’s paper notes, it was not growth alone that delivered the post-WW2 miracle. Instead it was “financial repression”, or the fact that governments kept interest rates below inflation for years amid capital and financial controls, stealthily robbing investors. It could be hard to repeat that trick in an era of digital markets.
Thus we face a long-term existential question: will governments eventually be forced to unleash sky-high inflation to reduce that debt? Will there be widespread debt forgiveness in the future to avoid a political or social explosion? That may seem hard to imagine now, but as the late anthropologist David Graeber described in his book Debt, the First 5000 years, jubilees — debt forgiveness by leaders — has sometimes occurred in history to avoid a social explosion. Or will there be mass defaults and a financial crisis?
Or could the 21st century instead turn into a period when interest rates remain so low for so long that we learn to accept eye-popping debt numbers as the inevitable corollary of high asset prices, expanded money supply and a frenetic financial system, and ignore them? Will debt just feel to investors and policymakers like the unread emails in our inbox: an issue which is scary and huge, but so constant that it is easy to ignore? We simply don’t know and may not find out until rates rise.
But the fact that our global system is three-times leveraged, and rising, deserves far more debate even if you are an optimist about the implications — which I am not.
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