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Borrowing by households, businesses and governments, how did the world get into a debt of 315 trillion dollars?

2024-05-29 11:35:13Biznes SHKRUAR NGA REDAKSIA VOX

Borrowing by households, businesses and governments, how did the world get into

According to the Institute of International Finance, the world is $315 trillion in debt. This combines borrowing from households, businesses and governments. With global debt at a record high, should we be worried?

The world is in debt. In the amount of 315 trillion dollars which follows and grows. $315 trillion is a staggering number to visualize, but consider this. In 2024, global gross domestic product, or GDP, reached $109.5 trillion, just over a third of the global debt figure.

Another way to put it? There are about 8.1 billion people living in the world today. If we were to divide that debt by each person, each of us would owe about $39,000. So, with global debt at a record high, should you be worried? And how did we get here in the first place?

Global debt combines borrowing by households, businesses and governments. You're probably more familiar with household debt, which includes things like mortgages, credit cards, and student loans. In early 2024, this reached $59.1 trillion.

Business debt, which corporations use to finance their operations and growth, fell to $164.5 trillion, with the financial sector alone accounting for $70.4 trillion of that amount. Finally, there is government debt, which is used to help finance public services and projects without raising taxes.

Countries can borrow from each other or from global institutions such as the World Bank and the International Monetary Fund. But governments can also raise money by selling bonds… which is basically an IOU from the government to investors. And like all loans, it includes interest.

The public debt was $91.4 trillion. While debt can have a negative outcome, it is not necessarily a bad thing. It can help an individual get an education or join the property ladder. It enables businesses to start and grow. And although the national debt is the most controversial of the three, it can give governments the power they need to build the economy, for social spending or to respond to a crisis.

Written records show that public debt has existed for at least 2,000 years, used primarily to create cities, towns, states and nations… and to finance wars. Governments have long accumulated heavy debt from war spending, such as the Napoleonic Wars, the Franco-Prussian War, and the US Civil War in the 19th century. World War II, the most expensive war in history, caused several debt crises, with most of the outstanding loans owed to the United States. Since the 1950s, there have been four major waves of debt accumulation.

The first wave of debt came from Latin America in the 1980s, which led 16 countries in that region to restructure their borrowing. The second wave affected Southeast Asia in the early 21st century, while the US and Europe bore the brunt of the third wave of global debt during the 2007-2008 global financial crisis.

We are now in the fourth wave, which began in 2020 and coincided with the Covid-19 pandemic. Governments had to take on even more debt to help businesses and its citizens cushion the impact of lockdowns. Global debt rose to 256% of GDP in 2020, an increase of 28 percentage points – and the largest one-year increase in debt since World War II.

But the pandemic simply exacerbated a problem that was already there. The debt had been accumulating for at least a decade before, as individuals, companies and governments spent beyond their means. Just look at this chart from the World Bank, which shows debt as a percentage of GDP rising rapidly since 2008.

This brings us to a critical question: how much debt is too much debt? When does it become unstable?

Simply put, it's when you can't take it anymore. So, for example, when a government is forced to make cuts in areas that hurt its people, such as education or health care, just to keep up with payments.

Take Zambia for example. In 2021, debt service accounted for 39% of its national budget. That year, the government spent more on paying off these debts than on education, health, water and sanitation combined. And this is completely hindering the nation's ability to invest in its future.

The debt-to-GDP ratio is the economic metric that compares a country's government debt to its gross domestic product. It is usually presented as a percentage and is seen as a good indicator of that country's ability to service its debts.

So let's pretend we have two countries, each with $30 billion in debt. It looks like they have the same problem, right? But if it turns out that one of those countries has a $30 billion economy and the other has a nearly $30 trillion economy, it's clear which country is shouldering the biggest debt burden.

This, often coupled with unfavorable foreign exchange and interest rates, is why debt is seen as more risky for smaller economies. But there are, of course, exceptions.

Japan, the world's fourth largest economy, is also one of the most indebted countries in the world, with total debt standing at over 600% of GDP. And while most of Japan's debt is public, in recent years it has been the financial sector piled up, not the government.

About two-thirds of the $315 trillion in debt originates in mature economies with Japan and the United States contributing the most to that debt pile. But overall, the debt-to-GDP ratio for mature economies has been declining.

Emerging markets, on the other hand, held $105 trillion in debt, but the EM debt-to-GDP ratio hit a new high of 257%, pushing the overall ratio up for the first time in three years. China, India and Mexico were the biggest contributors.

The fourth wave has been the largest, fastest, and most extensive increase in debt that we have seen since World War II. Better policies and financial regulations have kept a widespread debt crisis at bay. But with so much money on the line, the prospect of a stronger dollar or a trade war could be enough to drive one or more countries into bankruptcy.


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