How the world accumulated US$315 trillion in debt

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30th May 2024 – (Washington) Global debt has reached an unprecedented level, totalling a staggering $315 trillion, according to the Institute of International Finance. This figure encompasses borrowings from households, businesses, and governments worldwide, raising concerns about the implications of such a massive debt burden.

Borge Brende, president of the World Economic Forum, compares the current debt situation to that of the Napoleonic wars, stating that global debt is closing in on 100% of the global gross domestic product (GDP). To put this astronomical figure into perspective, the global GDP for 2024 amounted to $109.5 trillion, which is just over a third of the total global debt.

To further visualise the magnitude of the debt crisis, consider the fact that there are approximately 8.1 billion people inhabiting the planet today. If we were to divide the debt equally among all individuals, each person would owe around $39,000.

The world finds itself in this predicament due to the combination of household, business, and government borrowings. Household debt, which includes mortgages, credit card debt, and student loans, stood at $59.1 trillion in early 2024.

Businesses rely on debt to finance their operations and expansion, resulting in a total business debt of $164.5 trillion. The financial sector alone accounted for $70.4 trillion of this amount.

Meanwhile, governments accumulate debt to support public services and fund various projects without raising taxes. Countries can borrow from one another or from global institutions such as the World Bank and the International Monetary Fund. Additionally, governments raise funds by issuing bonds, which essentially serve as IOUs to investors and involve interest payments.

Public debt, which plays a crucial role in economic development, reached $91.4 trillion. Though often stigmatised, debt can facilitate individual education and homeownership, enable business growth, and equip governments with the necessary leverage to stimulate the economy, invest in social programs, or respond to crises.

Historical records indicate that public debt has been present for over 2,000 years, primarily used to establish towns, cities, states, and nations, as well as to finance wars. Notable examples include the Napoleonic Wars, the Franco-Prussian War, and the U.S. Civil War in the 19th century. World War II, the costliest war in history, triggered multiple debt crises, with a significant portion of the outstanding loans owed to the United States.

Since the 1950s, the world has experienced four major waves of debt accumulation. The first wave affected Latin America in the 1980s, leading to the restructuring of borrowings by 16 countries in the region. The second wave impacted Southeast Asia around the turn of the 21st century, while the third wave hit the United States and Europe during the 2007-2008 global financial crisis.

The current situation marks the fourth wave, which began in 2010 and coincided with the onset of the Covid-19 pandemic. Governments were compelled to accumulate even more debt to support businesses and citizens affected by lockdown measures. In 2020, global debt soared to 256% of GDP, representing a 28-percentage point surge—an unprecedented increase since World War II.

However, the pandemic only exacerbated an existing problem. Debt had been accumulating for at least a decade prior, as individuals, companies, and governments exceeded their means. A graph from the World Bank clearly illustrates the rapid climb of debt as a percentage of GDP since 2008.

This leads us to a critical question: How much debt is too much? When does it become unsustainable? The answer lies in the ability to afford it. When a government is forced to make cuts in vital areas such as education or healthcare solely to meet debt obligations, the burden becomes unbearable.

Zambia serves as an example, where debt servicing accounted for 39% of its national budget in 2021. During that year, the government spent more on debt payments than on education, health, water, and sanitation combined. This situation severely impeded the nation’s capacity to invest in its future.

The debt-to-GDP ratio serves as an economic metric that compares a country’s government debt to its gross domestic product. Usually expressed as a percentage, it serves as an indicator of a country’s ability to service its debts. For instance, two countries with identical $30 billion debts may face contrasting situations if one has a $30 billion economy while the other boasts a nearly $30 trillion economy. Smaller economies are more vulnerable to debt risks, particularly when coupled with unfavourable foreign exchange and interest rates.

Nevertheless, exceptions exist. Japan, the fourth-largest economy globally, carries a debt burden exceeding 600% of GDP. While a significant portion of Japan’s debt is public, recent years have witnessed the financial sector accumulating more debt than the government itself.

Mature economies, including Japan and the United States, contribute the most to the $315 trillion debt pile, accounting for around two-thirds of the total. However, the debt-to-GDP ratio for mature economies has been declining. On the other hand, emerging markets hold $105 trillion in debt, with the emerging market debt-to-GDP ratio reaching a three-year high of 257%. Major contributors to this ratio include China, India, and Mexico.