The most surprising thing about the news that the world’s debt reached a new high of $307 trillion is how little it caused a stir. Most people haven’t heard about it.
But this isn’t just another piece of info that you can scroll past to get to the next hot news story. Based on these numbers from the Institute of International Finance, it looks like countries around the world have forgotten how to be fiscally responsible.
In the same way, the rule books and standards that used to shape the way markets worked have disappeared. Why? Since the 1990s, the world has been bouncing from one crisis to the next. It seems like the next one comes along before the autopsies for the last one are finished.
We can argue about when this crazy ride started. Some might say that things began in 1994 or 1995, when Mexico and Barings Bank hit brick walls. Others say it was in 1997–1998, when growing Asia crashed and Russia went bankrupt, which brought down the Long-Term Capital Management hedge fund with it.
Then there was the dot-com bubble in 1999–2000, the terrorist attacks on September 11, 2001, and, of course, Wall Street’s big fall in 2008. As a result of the confusion in Europe’s debt from 2009 to 2010, it was their turn next. A “taper tantrum” in developing markets in 2013 caused shocks all over the world.
Many investors around the world are still trying to get over the “black swan” event that was Donald Trump’s election as U.S. President in 2016. Following that, Covid-19 showed up to surprise world leaders and their business plans.
Over the past 30 years, the government has always reacted by issuing more and more government debt and loosening money supply very quickly in order to boost demand and keep yields from going through the roof.
They learned that it was easier to let central banks run things over time. First, there’s the Federal Reserve, which took the lead in the U.S. in the mid-1990s. In Tokyo, politicians were happy to do the same thing and let the Bank of Japan run the largest economy in Asia at the time. When it took over in 1998, the European Central Bank did what the Fed and BOJ did.
The problem is that most of the crises that followed were handled by central bankers who were not elected. When governments did do something, it was to keep growth stable by taking on more and more debt. Then, central banks covered up the damage to the economy.
A wave of money at sea
To keep growth stable, governments have been taking on more and more debt.HOW TO GETTY
It quickly became common to only treat the symptoms of money problems instead of the underlying reasons. If you will, call it the new plan.
The ongoing arms race in borrowing and monetary easing is what makes the world’s debt $307 trillion and still growing.
It’s simple to lose sight of things. It makes sense that we think of big economies like the US and Japan as “too big to fail.” But at what point do the 10 economies with the most debt become “too big to save”? If I may borrow a phrase from “Jaws,” we can see that the International Monetary Fund needs a boat that is at least ten times bigger than the shark.
Rate policy in the U.S. has been normalized by the Fed for the past 18 months. It’s between 5.25% and 5.5% right now, and this week, Fed Chairman Jerome Powell put an end to hopes that the U.S. government is done tightening.
But Washington’s fiscal path keeps people thinking about the problems that the world’s biggest economy is facing. Nearly $33 trillion is owed by the United States, which is more than 29% more than the country’s GDP. To give you an idea, Washington owes more than the GDP of China, Japan, Germany, the United Kingdom, and France put together.
Now Powell is saying that his team might raise rates again. Of course, the question is why?
The Powell Fed is, in fact, trying to make up for two big mistakes. The first time was in 2019, when Powell gave in to Trump’s threats as president. The economy didn’t need the extra boost that came from the Fed cutting rates to make Trump happy.
Then, Powell’s team got the inflation spike in 2021 wrong because they believed the hype that it would only last a short time. The Fed had to play catch-up, and it might have needed to tighten even more to recover credibility.
But after COVID-19, the U.S. is seeing more inflation from the supply side than the demand side. So, President Joe Biden’s team did a better job than Powell’s team by taking steps to boost output and new ideas.
Still, there may be more rate hikes coming from the Fed, which will put even more stress on businesses, banks, and the government’s balance sheet.
The Bank of Japan in Tokyo has to deal with a different problem: how to even start leaving quantitative easing. Japan has the most debt of any modern country, and it would be nice if they had a plan after 23 years.
China is also dealing with two different types of debt: property debt, local government debt, and debt from the shadow banking industry. Europe today, on the other hand, seems to fall from one debt crisis to the next.
Many people have worried about a disaster with sovereign debt, but it hasn’t happened yet. The bad news is that the world has 307 trillion reasons to be afraid that things will never be the same again if one hits.