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Global Debt Levels Are A Ticking Time Bomb

By Daniel Lacalle, The Mises Wire | March 7, 2024

The relentless increase in global debt is an enormous problem for the economy. Public deficits are neither reserves for the private sector nor a tool for growth. Bloated public debt is a burden on the economy, making productivity stall, raising taxes, and crowding out financing for the private sector. With each passing year, the global debt figure climbs higher, the burdens grow heavier, and the risks loom larger. The world’s financial markets ignored the record-breaking increase in global debt levels to a staggering $313 trillion in 2023, which marked yet another worrying milestone.

In the Congressional Budget Office (CBO) projections, the United States deficit will fluctuate over the next four years, averaging an insane 5.8 percent of GDP without even considering a recession. By 2033, they still expect a 6.9 percent GDP budget hole. Unsurprisingly, the economy, even using optimistic scenarios, stalls and will show a level of real GDP growth of 1.8% between 2028 and 2033, 33% less than the 2026–2027 period, which is already 25% lower than the historical average.

Some analysts say that this whole mess can be solved by raising taxes, but reality shows that there is no revenue measure that will fill an annual financial hole of $2 trillion with additional yearly receipts. This, of course, comes with an optimistic scenario of no recession or economic impact from a higher tax burden. Deficits are always a spending problem.

Citizens are led to believe that lower growth, declining real wages, and persistent inflation are external factors that have nothing to do with governments, but this is incorrect. Deficit spending is printing money, and it erodes the purchasing power of the currency while destroying the opportunities for the private sector to invest. The entire burden of higher taxes and inflation falls on the middle class and small businesses.

Markets never react to rising risks until reality kicks in. Risk builds slowly but happens fast. This is why governments feel so comfortable adding more public debt. Politicians think that bullish markets and low bond yields are a validation of their policies, and even when interest expenses rise to alarming levels, they just pass the burden onto the next administration. The result? Eroding potential growth, weaker productivity, and the destruction of the middle class through higher taxes and persistent inflation.

Debt crises happen. and governments never pay attention to the risks because they do not pay for the consequences. Furthermore, by the time a debt crisis happens, most governments will blame “markets” and short sellers.

The latest data from the Institute of International Finance (IIF) shows that the dangerous trend of rising debt has accelerated. A $15 trillion surge in debt over the course of a single year underscored the alarming pace at which the debt burden was escalating. To put this figure into perspective, it is worth noting that just a decade prior, the global debt tally stood at a comparatively modest $210 trillion—a stark reminder of the exponential growth trajectory that debt has embarked upon.

Developing economies are leading the path of this debt onslaught, with debt-to-GDP ratios reaching unprecedented heights. Emerging markets are following the developed nation trend, adding structural challenges and vulnerabilities as debt accumulation leads to the destruction of the local currency and diminishing confidence in the domestic monetary systems.

The implications of this debt binge are significant, including weaker economic growth and a danger to financial stability. At its core, the surge in global debt represents a fundamental imbalance—an imbalance between present consumption and future obligations, between short-term expenditure and long-term sustainability. Cheap government debt promises higher growth and better opportunities for citizens but only delivers weaker growth, higher instability, and an increasingly worthless currency. If you wonder why your wages are paying for fewer goods and services and why the middle class finds it increasingly difficult to thrive, blame it on money printing and public debt. It is eroding the purchasing power of your savings and wages under the false promise of growth and security that never arrives.

As debt levels swell, so do the risks of debt distress, default, and contagion. Debt is currency printing; the confidence in the purchasing power of the newly issued money slumps as debt balloons. Furthermore, a sudden loss of market confidence or a liquidity crunch in one corner of the globe can swiftly snowball into a full-blown financial crisis with far-reaching systemic implications. To think this will not happen in the United States is myopic and reckless. The interconnected nature of the modern global economy means that no nation exists in isolation, and the repercussions of a debt crisis in one area can reverberate across the entire financial ecosystem.

Beyond the immediate risks of financial instability, the long-term consequences of excessive debt accumulation are equally troubling. High debt levels function as a drag on economic growth, siphoning off resources from productive investment and stifling innovation and entrepreneurship. Moreover, the burden of servicing debt imposes a heavy toll on future generations, diverting funds away from infrastructure spending and saddling future taxpayers with a legacy of debt.

The end of the United States dollar will not come from external threats but from the irresponsible actions of its own government. Cheap debt is always exceedingly expensive.

Daniel Lacalle, PhD, economist and fund manager, is the author of the bestselling books Freedom or Equality (2020), Escape from the Central Bank Trap (2017), The Energy World Is Flat​ (2015), and Life in the Financial Markets (2014). He is a professor of global economy at IE Business School in Madrid.

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