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Global Debt

Why is it in the news?

  • According to the Institute of International Finance (IIF), the Global debt reached an all-time high of $307 trillion by the end of June 2023.

About Global Debt

  • Global debt as a percentage of gross domestic product (GDP) is on the rise again, reaching 336% after a sustained decrease over seven consecutive quarters.
  • Over the past decade, global debt has increased by approximately $100 trillion.
  • Global debt encompasses borrowings by governments, private businesses, and individuals.
  • Governments borrow to finance various expenditures, including those not covered by tax revenues or to pay interest on past debts; and private sector borrowing is primarily for making investments.
  • Global debt levels have been steadily increasing over the years, with occasional pauses. The pandemic temporarily halted this trend.
  • The recent rise in global debt has been driven largely by advanced economies, including the U.S., the U.K., Japan, and France, contributing over 80% of the increase in the first half of 2023.
  • Emerging market economies, such as China, India, and Brazil, have also witnessed significant debt growth.
  • Despite expectations that rising interest rates might curb loan demand, global debt has continued to rise. Such increases are typical, as the money supply in economies generally expands each year.
  • The decline in global debt as a percentage of GDP over seven consecutive quarters before 2023 is more significant than the overall debt increase. This decline was attributed to rising price inflation, which allowed governments to reduce their debt burdens in local currency terms by inflating away the debt.
  • Inflating away debt refers to central banks using newly created currency to pay off government debt, causing overall prices to rise, effectively imposing an indirect tax on the economy to service government debt.
  • Rising global debt levels raise concerns about debt sustainability, particularly regarding government debt.
  • Higher interest rates, intended to combat inflation, may strain governments with heavy debt burdens, potentially leading to default or inflation-driven debt reduction.
  • Analysts suggest that some governments may never fully repay their debts and may rely on inflating away debt to avoid default.
  • The International Financial infrastructure may not be adequately prepared to address unsustainable domestic debt levels.
  • Rapid increases in private debt are often associated with unsustainable economic booms and can lead to financial crises when not supported by genuine savings. The 2008 global financial crisis serves as a recent example of this phenomenon.

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