Total world debt, public and private, was $253 trillion by October last year [1]. Without debt, our economies would not function. It is the very fabric of our economies. Our economy is like a house of cards built using money created by debt. And as with a house of cards, removing any card other than the top ones will result in a collapse of the entire construction. Therefore nothing can be allowed to take precedence over maintaining this fragile construction. The house of cards has allowed us to reach previously unimaginable heights, albeit with money we don’t have. But at what cost? We may have created a hydra that we can never defeat.
Let’s start with a brief overview of the situation. Quantitative easing (central banks buying public and private bonds to pump money into the economy) has tripled since the 2008 crisis [2]. This, together with a low-interest environment and we get a staggering 50 per cent increase in company, household and government debt since 2008 [3]. The situation is dire in more than 100 low -and middle-income countries who must pay $130 billion in debt service this year [2]. A number that is roughly 30 per cent of these governments’ annual budgets [4].
Why should we care about debt? Debt, if not repaid, can cause a cascade of defaults. In October last year, the IMF warned that 40% of all corporate debt could be considered “at-risk” in another global downturn [5]. High debt is a problem even if the debtor doesn’t default on the loan. Low-income countries’ governments will cut back on social and health expenditures in order to service their debt because they simply can’t access cheap loans as advanced-economy governments can. All governments will have to repay the debt at some point, either by raising taxes and/or lowering social spending [6]. The most popular option, however, is growing the economy to make the loans cheaper. Thus, understanding debt is key to understanding why economic growth always stands superior to the climate and other goals.
What is really driving this accumulation of debt? I believe it is fundamentally driven by a set of expectations that we have. We have this star-sprinkled unicorn idea of an economy forever growing at a pace of 2% per year. This is taken to be “the normal” from which any deviation is interpreted as a malaise. The normal is based on the arbitrary assumption that the future will be like the past. The very thought of a new equilibrium growth level is not considered. If, god forbid, we only buy 0.5% more iPhones, trips to Thailand or restaurant visits then policymakers will be worried. And so when they wake up, they’ll call the doctor who’ll prescribe the cure: monetary policy, fiscal policy or so-called structural reform. But applying a cure to a patient who isn’t sick may create a problem rather than solve one.
So instead of ramping up taxes or cutting social spending, we’ve been doubling down on growth to pay for past debt. To “double down”, we incur even more debt. So the self-feeding cycle continues. When will it end? I don’t know. Maybe never. But there is a point at which it is no longer sensible to hand out more loans to economies and companies who cannot pay interest on their loans (i.e. toxic assets). If this group ever grows large enough, the market will lose faith in the stability of the house of cards and thus attempt to ‘cut their losses’. Get their card out before it falls so to speak. That will mark the beginning of the end.
Sources:
- https://www.cnbc.com/2020/01/14/global-debt-hits-all-time-high-of-nearly-253-dollars–iif-says.html
- https://www.project-syndicate.org/commentary/how-to-prevent-looming-debt-crisis-developing-countries-by-joseph-e-stiglitz-and-hamid-rashid-2020-07
- https://www.cnbc.com/2019/03/12/global-debt-up-50-percent-since-the-financial-crisis-sp-says.html
- https://www.ft.com/content/6f9932d4-5bf0-425d-b536-135d834ad20c
- https://www.reuters.com/article/us-imf-worldbank-gfsr/imf-heightens-warnings-on-corporate-debt-following-central-bank-cuts-idUSKBN1WV1N5
- https://voxeu.org/article/growth-shadow-covid-19-debt
