Looming global debt crisis: reasons to worry about the elephant in the room
- The mountain of global debt has grown to record size in the past decade but has gone largely unnoticed as governments keep spending and printing money
- Global financial institutions are now sounding the alarm, but governments and central banks are in no mood to listen
“We live in dangerous times,” two senior International Monetary Fund economists wrote in a recent blog. Few would challenge that assessment as the world confronts the multiple threats of possible nuclear conflict, galloping inflation, rising interest rates, economic recession and the ongoing Covid-19 pandemic.
Debt crises have a way of keeping their heads below the parapet until they attack, but once they do so it is often with great ferocity. As World Bank chief economist Carmen Reinhart put it, “Prior to crises, it’s often the things that you don’t see that ultimately get you.”
Debt mountains such as the one we have now are the elephants in the room. They are huge but often go unnoticed or unacknowledged. This one had reached US$303 trillion – some three times the size of global annual GDP – by the end of 2021, according to the Institute of International Finance.
Governments around the world have spent aggressively to help households and employers weather the economic impact of successive waves of Covid-19. This means the burden of keeping economies afloat has been passed from businesses and households to governments and then on to banks.
The cost of money doesn’t seem to have occurred to those making such assumptions. At least some have argued that interest rates stabilised at a new and low “natural” or neutral level, from where they were unlikely to rise in the foreseeable future.
The sheer volume of warnings sounded during the recent spring meetings of the IMF and World Bank, its Bretton Woods sister institution, was obviously intended to tell policymakers the risk of a debt crisis was very real.
“As economies recover and inflation accelerates, governments should take account of the impact of fiscal and monetary policy tightening on the most financially stretched consumers and businesses when pacing the exit from extraordinary support policies,” the IMF urged.
Where will they turn this time, when governments themselves are reliant on banks to fund their massive post-pandemic spending needs that will grow even larger in the wake of the Ukraine conflict and in the light of a probable global recession?
It is difficult to see where we go from here. Perhaps it will be into a corrective contraction to compensate for past excesses and for the artificial expansion of demand via excess money creation and asset inflation, or maybe into a great inflation that will erode away the debt mountain.
Anthony Rowley is a veteran journalist specialising in Asian economic and financial affairs