We are in the midst of a worldwide credit boom that may be without precedent. The debt explosion suggests that the global economy — all the national economies combined — is being driven heavily by massive government and private borrowing.
Is this debt buildup stable? Or is it the harbinger of a sharp economic slowdown or crash? No one really knows, but the numbers certainly give pause. While everyone is fixated on President Trump and his opponents, hardly anyone is paying attention.
The latest figures come from the Institute of International Finance (IIF), an industry research and advocacy group. It reports that in September, worldwide debt totaled $244 trillion, or almost a record 318 percent of world gross domestic product. That figure covers all government, household and nonfinancial business borrowing. (World GDP means total global output.)
Here’s a detailed breakdown. Government debt has tripled from $20 trillion in 2000 to $65 trillion in 2018, rising as a share of GDP from 55 percent to 87 percent. Household debt has increased over the same years, from $17 trillion to $46 trillion (from 44 percent to 60 percent of GDP). Finally, nonfinancial corporate debt rose from $24 trillion to $73 trillion (71 percent of GDP to 92 percent).
“Debt has fueled a good deal of economic growth,” says economist Sonja Gibbs of the IIF. Higher borrowing is widespread, though countries borrow differently. Government debt, for example, is highest among mature economies, such as the United States and France. By contrast, business borrowing has been more common in “emerging-market” countries (China, India, Mexico).
There are no universal rules on how much debt is too much. A lot depends on investor psychology — that is, confidence or fear. Behavior can be self-fulfilling. If banks and bondholders believe debts will be repaid, then they will be, because borrowers will raise new loans to replace the old. Similarly, if lenders fear debts won’t be repaid, they may withhold new loans.
For the moment, confidence seems to be holding. One reason may be low interest rates, which make it easier for borrowers to carry large debts.
Still, the debt buildup poses dangers. The first — and maybe the most likely — is that both borrowers and lenders become more cautious. Lenders fear defaults and delinquencies; corporate borrowers worry that they won’t be able to “roll over” existing loans, while household borrowers fear losing their homes or cars.
If economic growth slows, then servicing outstanding debts becomes harder. “The risk is not [an economic] blowout but a slow slog — slower growth,” Gibbs says. “As debt service gets bigger, it takes away from what you can do with more borrowing. It diverts from more productive uses.”
Another risk is that over-indebted businesses in emerging-market countries trigger some sort of financial crisis. Loan losses force some banks to close or stop lending. The circumstances are particular to individual countries or industries, but if too many local crises occur, the global economy could lose steam.
Finally, there’s “rollover risk” — the possibility that borrowers won’t be able to renew existing loans. That prospect seems particularly strong among emerging-market borrowers. According to the data from the IIF, emerging-market borrowers face $2 trillion of maturing debt in 2019, with about a quarter of those loans made in dollars (most of the rest are in local currency). To avoid default, borrowers must somehow raise those dollars, either from a new loan or from other sources.
When it comes to global debt, we may be in unexplored territory. The only certainty, as the IIF’s Dylan Riddle puts it, is that “there’s been a breathtaking accumulation of debt in the last decade or so.”
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