The Unstoppable increase of Global Debt

The new year of 2020 that marks the beginning of the third decade of the 21^st  century, finds the level of global debt (public and private debt) to move nonstop on an upward path by breaking down one record after another  ($188trillion, 2018,  and  $184  trillion, 2017,  Source:  IMF  and  https://Blogs. IMF.org)  with about two thirds of these sizes being  nonfinancial  private  debt  and  the  rest  public  debt.

by Thanos S. Chonthrogiannis

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The reasons for increasing the Global Debt

In terms of the Global Debt-to-Global GDP index for 2018, the average moves to 226%, rising to 1.5% compared to 2017. Following the outbreak of the 2008 financial crisis caused by the collapse of the investment bank Lehman Brothers Holding Inc., the global debt during this decade (2008-2018) increased by 50%. The reasons for increasing the global debt can be summarized in the following:

1. The drastic increase in government debt.

2. The long-term application of an unconventional type of monetary policy from all the main central banks in the world which has resulted in a drastic fall in borrowing costs and keeping it at historically low levels for several years.

3. The drastic reduction in yields of governmental bonds on global capital markets, reaching many of these yields for a long time to be a negative sign, favouring further borrowing by governments.

The debt of the developed and developing economies of the planet

Most the world’s developed economies present public debt levels much higher than those before the outbreak of the global financial crisis of 2008. On the other hand the ratio of Gross  Debt/GDP  of developed economies in 2019 reached 103.1% (Source: IMF, https://imf.org/external/datamapper/ profile/ADVEC/WEO).

Accordingly, the public debt levels of developing countries are moving in an upward orbit. The details of the World  Bank  (www.worldbank.org)  indicate that from 2010 until 2018 the debt of these countries amounted to 168% of their GDP, with their own total debt (private  debt  (households  and  business)  and  public  debt  reaching a height of $55 trillion.

These amounts of $55 trillion have received them as loans 100 countries, while China has received the highest percentage of loans from this amount. The   reason for the  Gross  Debt/GDP  of  emerging  markets  and  developing  economies   2019  reached    53.3%% (Source: IMF, https://imf.org/external/ datamapper/profile/OEMOC/WEO).

It should be noted that public debt and private debt both in developed economies and in developing economies have a high degree of correlation between the decade in question indicating that their upward trend is common. For example, in the U.S. corporate debt (part of the private debt) follows a continuous frantic upward trend from 2011 until the end of 2018.

The implications and the solution

The ejection of global debt creates all those conditions for the emergence of strong financial crises which would mainly affect developing countries and the largest proportion of their population. In turn, these impacts on the populations of these countries will create social unrest which in turn will alter the political backdrop in these countries.

The new political scene will either be forced to borrow even more in order to increase public spending by ignoring any restrictive fiscal policy that should accompany additional borrowing (socialist governments) or it must proceed to measures of drastic containment of public expenditure and economic rationalism of the state budget which will also affect the low income levels of the population.

Trade wars (obvious or hidden) that are raging on the planet will cause an even greater restriction of international trade by exacerbating the sustainability of the debt and if borrowing rates do not continue to remain at low levels (increase of lending rates) then there will be a chain of financial crises that will not allow the economies of most countries on the planet to go into a phase of long-term economic growth.

The solution for most countries is the direct rationalisation of their public spending in their state budgets, while their public investment should have a high degree of reciprocity per $ investment.

At the same time, both government and corporate debt should be restructured on the basis of long-term service from the corresponding short term which may be today in order to allow governments and their administrations respectively to have considerable room for man oeuvre in their budgetary and investment policies respectively.