The Institute of International Finance (IIF) reported in its latest Global Debt Monitor on February 21 that the global debt mountain grew by over $15 trillion last year and the total is now a record $313 trillion. But it's not so much the facts that are cause for concern.
Nor is it a warning from the IIF that uncertainty over US interest rates and the dollar could increase market volatility and tighter financing conditions for some countries and that “increasing geoeconomic fragmentation, geopolitical conflicts and increasing trade protectionism are leading to more frequent and abrupt changes in global risk could lead to “feeling”.
It is this fact that the recent inflation episode in the US was more than just “transientA longer period of rising interest rates followed, which also proved to be more than just temporary. All other things being equal, the global economy could cope.Groceries are for sale at a supermarket in Chicago, Illinois on August 9, 2023. The US Federal Reserve began raising interest rates in March 2022 to combat inflation. Photo: Getty Images / AFP
But other things are not the same, or at least not as they were during previous debt crises. The “great slowdown” in inflation from the mid-1980s to 2007 was accompanied by widespread excess global borrowing.
This borrowing is a burden at the best of times, but when it is followed by a strong and rapid series of interest rate hikes like those seen over the last two years, which are unlikely to be reversed any time soon, it becomes looming especially to prove harmful.
This doesn't seem to have sunk in yet with financial markets, which are celebrating the fact that inflation appears to be stabilizing and falling. Markets are still euphoric enough to drive stock prices from Tokyo to New York to record levels, and the IIF report suggests growing demand for loans in some markets.
Japan's split-screen economy: booming stocks and shrinking GDP
The fact that the effects of high debt are not fully recognized is not solely the fault of the financial markets. There are many equation-laden models at the macroeconomic level, but they are harder to find at the financial system level.
This is not good enough, especially in the age of artificial intelligence. Economists virtually ignored the impact Asset inflation (in stock and real estate prices) for decades and the financial system often seems to be under their ivory tower gaze. The sudden and unannounced emergence of financial crises is nothing new. Remember the stock market crash of 1929 and the Great Depression, the OPEC oil price shock in 1973, the Latin American debt crisis in the 1980s, etc Asian crisis 1997 and that global financial crisis from 2008.
The IIF report finds that around 55 percent of the increase in global debt has come from mature markets, mainly the US, France and Germany. In emerging markets, debt accumulation was mainly concentrated in China, India and Brazil.
By sector, the largest increase in the dollar value of outstanding debt was observed among central governments, followed by non-financial companies. Nonfinancial debt reached $244 trillion, exceeding pre-pandemic levels by $45 trillion.
The rising debt is not just a Chinese problem
Among the four main debt categories included in the IIF data (households, non-financial corporations, government and financial sector), corporate debt leads the way with a total value of $94 trillion at the end of 2023, up from nearly $90 trillion one year ago. Of this, $51 trillion came from mature markets and $44 trillion from emerging markets.
Second was national debt, totaling $90 trillion in 2023, up from $84 trillion in 2022, followed by financial sector debt, totaling $69 trillion (up from $67 trillion), and private sector debt Households totaling $59 trillion (up from $57 trillion). Mature markets accounted for the majority of the debt at $208 trillion, of which emerging markets accounted for $105 trillion at the end of 2023.
By country, the IIF only expresses debt levels as a percentage of gross domestic product and not in monetary terms. Standouts for this metric include public debt at 230 percent in Japan, 120 percent in the U.S. and a more modest 86 percent in China.
Corporate debt is high in China at 167 percent of GDP and in Japan at 115 percent, while in the United States it is a more modest 78 percent. Household debt in the United States is a relatively high 73 percent of GDP, compared to 64 percent in Japan and 62 percent in China. Such data is useful from a statistician's perspective, but does not provide a holistic picture that would help markets determine when and where danger levels have been reached.
Anthony Rowley is an experienced journalist specializing in Asian economics and finance
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