EDITOR NOTE: There was a time when economists would have thought that global debt ratio equivalent to 356% of the world’s GDP was not only unsustainable but, more appropriately, laughable and inane. Certainly, it must be a joke, many of them would have thought. Yet that’s the condition we find ourselves in amid the COVID-pandemic. Around 165% of this debt belongs to the private sector. When businesses borrow large sums of money, it’s usually for purposes of investment and expansion. You borrow hoping to build a stronger future. It’s a much smarter way to use debt, and even then, there’s no guarantee of a favorable outcome. Yet, the current debt expansion is not about the future. Almost none of it is for growth and investment. It’s all for surviving the present circumstances, which makes for genuinely screwed circumstances. Jerome Powell is about to address this potentially-disastrous scenario this week in front of the House and Senate. Investors are justifiably concerned. Corporate debt is at historic highs. The risk of business failures is frighteningly high. And the prospects for business growth and, in turn, economic growth, are growing increasingly dim.
The world's debt-to-GDP ratio rose to 356% in 2020, a new report from the Institute of International Finance finds, up 35 percentage points from where it stood in 2019, as countries saw their economies shrink and issued an ocean of debt to stay afloat.
Why it matters: The increase brings numerous countries, including the U.S., to extreme debt levels, well beyond what economists have called untenable in the past.
- Nonfinancial private sector debt alone now makes up 165% of the entire world's economic output.
What they're saying: "The upswing was well beyond the rise seen during the 2008 global financial crisis," IIF economists said in the report.
- "Back in 2008 and 2009, the increase in global debt ratio was limited to 10 percentage points and 15 percentage points, respectively."
By the numbers: Global debt increased to $281 trillion last year, with total private and public sector debt rising by $24 trillion in the 61 countries IIF follows.
- That rise accounts for more than a quarter of the $88 trillion increase in debt that has been accumulated over the past decade.
- Government debt accounts for 105% of global GDP, up from 88% in 2019, rising by $12 trillion in 2020 or nearly triple its $4.3 trillion increase in 2019.
- Debt in the financial sector rose by more than 5 percentage points to 86% of GDP in 2020. This was the largest increase since 2007 and the first annual increase since 2016.
Why the debt matters: While worries about significantly pushing up inflation and borrowing costs have not come to pass, slow growth and diminishing returns have, and the world's already high debt levels look to be inhibiting economic growth and threaten to hold back a full recovery from the pandemic in the long run.
- Further, almost all of the debt issued in 2020 was to deal with present circumstances rather than to invest in forward-looking projects or growth, making future investments in such projects more difficult and potentially more costly.
Where it stands: The CBO projected U.S. GDP growth over the next 10 years will be largely below 2% (with the notable exclusion of 2021), and that annual budget deficits will increase.
- The federal debt is set to exceed the size of the economy this year for only the second time since the end of World War II and grow to 107% of GDP by 2031.
- That projection was made without including President Biden's proposed $1.9 trillion stimulus package.
Originally posted on Axios