Global debt growth is out of control, and that may be causing the world economic slowdown this year. This unprecedented surge in global debt in the last several years leaves us vulnerable to a global recession, a new financial crisis or something even worse. Unfortunately, most people around the world are not aware of this, so the alarm bells are mostly silent.
At the end of March, worldwide debt totaled $246.5 trillion, reports the Institute of International Finance (IIF), an industry research and advocacy organization. That equals almost 320% of world Gross Domestic Product (GDP), up from less than $210 trillion in 2012.
Although no one knows how much can be borrowed safely, we may be about to find out. The dangers should be obvious. In addition to limiting economic growth, too much borrowing will at some point lead to defaults, which could well be contagious.
President Trump apparently does not understand the potential dangers if this trend continues, or if he does, he says the next financial crisis won’t occur until after he is out of office. So, we just continue to kick the can down the road. Unfortunately, that plan only works until it doesn’t.
Despite that, Mr. Trump continually pressures the Federal Reserve to cut short-term interest rates so the economy remains strong, at least through next year’s elections. While it may be true that the economy is stimulated initially by lower interest rates, but if defaults start to happen – as they surely will at some point – we could find ourselves in a global recession and/or a new financial crisis.
What further confuses the situation is that different countries have different experiences and different tolerances for debt. The United States – the world’s largest debtor by far – has so far shown a high tolerance for borrowing. One reason we can do this is the fact that our currency is the US dollar, which is also the world’s “reserve currency.” Another reason is that US Treasury securities are considered among the safest assets in the world.
Take a look at the table below. It shows the debts of several large nations and of the world. The debt figures include total borrowings of households, non-financial businesses and governments. The loans come in many forms and maturities, ranging from home mortgages to business loans to government bonds.
The table has one inescapable message: Since at least 2012, the economic recovery has depended heavily on the assumption of more and more debt. In some countries, the stimulus has come from added government debt. In others, business and household borrowing have taken the lead – or in most cases, all the above.
But regardless of the sources of borrowing, the question is: How much longer can the borrowing boom continue? No one knows, of course, but it will reverse itself at some point. The problem is by the time it is obvious that the borrowing binge has reversed, it may well be too late to do anything about it.
So far, low global interest rates have helped sustain the world economy. But there are limits to how long this can continue. As I reported last week, China just reported the slowest growth rate – 6.2% annual rate over the past year – since 1992, despite easy money.
As we all know, interest rates are not going to remain this low indefinitely. When rates move back to more normal levels, the cost of servicing $250 trillion or more in debt would double or triple or more. That alone could spark a new global financial crisis.
Economists at the IIF worry that the worst is still to come. Borrowing by emerging market countries — Brazil, India and China, alone — represents about 30% of global debt, the IIF estimates. Almost $3 trillion of these loans and bonds must be renewed (“rolled over”) by the end of 2020.
That is a LOT of debt that has to be rolled over the next 17 months! And that represents only the debt of three countries. I believe 2020 will be a pivotal year in the global debt markets.
While I don’t know how much longer the global debt binge can continue, I do not think it ends pretty!
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