Global Debt History
Imagine if one day your debt piled so high you owed more than three times your income. Global Debt History
For an individual, it’s a nightmare scenario. Unimaginable. For countries, it’s simply how the economy works. Financial obligations are stacking higher each year, and global debt history shows us a worrying statistic — the world’s nations owe three times more money than they spend in a single year.
Governments, households, and companies have contributed to the current debt of more than $243 trillion, and consumerism appears to be the driving force. We’re encouraged to spend more. And why not? Spending keeps money moving through the system, encouraging a healthy economy – and sometimes tax cuts and increased government spending are the only way to get a country out of recession.
It’s impossible to look at global debt stats & facts, or a single country’s national debt, in complete isolation. Most often, it’s not a mark of how well a country is doing — after all, the world’s richest nations, the countries with the steadiest economies, are also the most indebted.
There are many factors to examine if you want to understand the impact of global debt on the economy. That’s exactly why we made this infographic. It provides a clear-cut analysis of important global data, and it shows you the specifics of how much different countries of the world owe compared to their GDP. It’s simple, it’s straightforward, and it gives you everything you need to know.
‘Plan A Has Failed’ — Global Debt To Hit $255T or $12.1M Per Bitcoin
The world’s combined debt will hit $255 trillion by the end of 2019 — equal to $32,500 for each person on the planet or $12.1 million per Bitcoin (BTC).
Bitcoin figures reacted with shock to the latest figures from the Institute of International Finance, which this month updated its Global Debt Monitor.
$12.1 Million Per Single Bitcoin
By the end of the year, the world’s debt will have expanded by an extra $12 trillion compared to the end of 2018.
The timely data comes as United States national debt alone hits $23 trillion, with the Federal Reserve undaunted by the idea of debt continuing to expand.
As Cointelegraph reported, while Fed chair Jerome Powell has described the current debt trajectory as “unsustainable,” he considers there to be no critical problems with not paying it off.
For Bitcoin proponents, however, the verdict on the fiat economy creating over $12 million of debt for each Bitcoin that will ever exist was obvious.
“Plan A has already failed,” online analyst Rhythm summarized on Nov. 15.
“That’s How You Fight The War Today”
Never before has the combined debt of the world been so high. As Bitcoin continues to rise in prominence, efforts have increased to educate consumers about its benefits as hard money — money which no authority or single actor can manipulate.
Fiat currency, on the other hand, can be manipulated ad infinitum by central banks through economic policy. Continuing arguments made by Saifedean Ammous in his popular book, “The Bitcoin Standard,” Trace Mayer this week appealed to listeners of the Tales from the Crypt podcast to take back control of their finances.
“Are you going to claim your monetary sovereignty? Hold your own private keys? Run your own full node? That’s how you fight the war today,” he said.
Mayer also runs Proof of Keys, an annual event aimed at existing Bitcoin holders, challenging them to remove their holdings from third party wallets on Jan. 3.
Global Debt Reaches New Highs — Is BTC A Solution Or A Beneficiary?
Global debt has surpassed $250 trillion. That’s 320% of gross domestic product, announced the Institute of International Finance on Nov. 14. Emerging market debt also hit a record $71.4 trillion, 220% of GDP.
This has set off alarm bells. After all, the projected year-end amount of $255 trillion is equal to $32,500 for each person on the planet, or $12.1 million per Bitcoin (BTC), as Cointelegraph reported.
But, as mind-boggling as it may appear, is this total debt really so bad? Debt, after all, can stimulate growth, enabling a country to build roads, bridges, canals and universities, as well as pay pensions and ensure a higher well-being of its nation. It can raise a nation’s standard of living. IIF spokesperson Dylan Riddle told Cointelegraph:
“That level of debt is a point of concern because it represents a massive accumulation of debt in the last decade. Since the last recession, the world has added about $75 trillion worth of debt.”
However, things may not be so dire. As William D. Lastrapes, professor of economics at the University of Georgia, told Cointelegraph:
“It is difficult to say if global debt of $255 trillion is too much. It depends on which countries contribute to this — seems to be mostly US and China — and many, many other factors.”
The challenge with regard to debt is to know how much is too much. Economists have been battling over this point for years, usually in terms of the debt-to-GDP ratio. A highly influential paper earlier this decade placed the tipping point at 90% — that is, a country’s economic growth drops significantly when the size of its debt rises above 90% of its gross domestic product.
The 2010 paper “Growth in a Time of Debt,” by Carmen Reinhart and Kenneth Rogoff, was published around the time Greece’s economy was floundering, and the paper’s conclusion reportedly spurred public and quasi public officials — including those at the International Monetary Fund — to flip from stimulative to austerity in their response to Greece’s debt woes.
The paper also drew scathing attacks, most prominently from economist and Nobel laureate Paul Krugman, who censured the authors’ “coding” error, deplored the “austerity mania” that their paper unleashed among policymakers, and chided them for confusing correlation with causation. On the subject, Lastrapes noted to Cointelegraph:
“Public debt is not intrinsically a bad thing. It allows governments to separate the ‘timing’ of its expenditures from the ‘timing’ of its tax revenues. Without the ability to borrow, governments would be able to spend only as taxes are collected, which is in general not optimal (for example, think of public investment in infrastructure).”
Conversely, a low debt ratio is no guarantee of a healthy economy. As Lastrapes has noted elsewhere, Venezuela’s sovereign debt was only 23% of its GDP in 2017, yet its economy has been in turmoil for several years. Still, some in the crypto community have been skeptical about an imminent economic collapse. Vinny Lingham, CEO of blockchain identity platform Civic, told Cointelegraph:
“We’re way past the point where the bubble should have burst. It should have happened long ago. We’re in uncharted territory now.”
With the Institute of International Finance’s global debt ratio now at 320% — well beyond Rogoff’s 90% “tipping point” — and no apparent signs of Armageddon’s arrival, it appears the debt-ratio model might be flawed, Lingham suggested. Therefore, a new debt model that reflects reality may now be needed. In any case, he believes some intellectual humility is called for. As Lingham said, “Things have become unpredictable.”
It seems hard to believe, though, that living on borrowed money won’t catch up with everyone eventually. As the IIF noted in its Nov. 14 commentary, “With limited room for further monetary easing, debt service costs will be an increasing constraint on fiscal policy.” Lastrapes sees it another way. He told Cointelegraph:
“Government debt becomes problematic when it appears likely (in the eyes of bondholders) that future tax collections will be insufficient for the debt to be paid back. Debt default is the ultimate sign of fiscal irresponsibility and will harm a defaulting nation’s ability to borrow in the future.”
For a country like the United States, which is servicing its debt and has sustained growth as well as strong economic and fiscal institutions, large amounts of debt are not necessarily a problem, Lastrapes added. The fact that today’s interest rates and treasury yields remain low reinforces this view.
But the U.S. situation does not necessarily reflect that of the developing world. Countries like Argentina, Turkey and Iran may not be able to service their debt, and will consequently be blocked from investing in infrastructure, education, health and other needs.
Would Bitcoin Soar If The Bubble Bursts?
The global debt mountain referenced by the IIF drew the attention of the crypto community as well. The assumption of some is that the price of Bitcoin and other cryptocurrencies could soar if and when the debt bubble bursts. As Erik Voorhees said on an earlier occasion with respect to U.S. debt and a potential situation in which corporations will become unable to repay their debts, “fiat is doomed… watch what happens to crypto.”
This remains a point of debate though. The fact of the matter, said Lingham, is that if the world decided tomorrow to abandon fiat currency and embrace Bitcoin, the cryptocurrency couldn’t handle it. Bitcoin lacks scale — still only able to handle around 7 transactions per second compared to Mastercard’s claim of processing 50,000 TPS. The cost of a single Bitcoin transaction would skyrocket, perhaps into the thousands of dollars.
That said, many crypto evangelists can envision the collapse of the post-Bretton Woods banking system, and its replacement by Bitcoin as the world’s reserve currency. A January white paper laid out the steps by which this might actually occur, though it first requires the price of Bitcoin to reach stratospheric heights:
“If Bitcoin climbs to $10 million per Bitcoin, it could provide the world community with a stable currency, replace sovereign currencies, and act as the reserve currency of the world incapable of inflation or deflation. It would represent the ultimate ‘Store of Value.’”
Why $10 million? At that point, Bitcoin provides a sufficient reserve to alleviate the world’s debt burden. The authors add:
“Bitcoin would be worth between $180 trillion and $210 trillion (depending on when that price was reached). Assuming world debt had reached $500 trillion at that time, remember it has grown by 394% over the past 20 years, Bitcoin would represent a 40% reserve against the debt.”
A realistic possibility? Maybe not, the authors allow. It would require, among other things, the destruction of all altcoins — as they suppress demand for Bitcoin — as well as Bitcoin overtaking gold as a store of value when it is somewhere between the $100,000 and $400,000 price mark.
Also, Bitcoin’s developers have to deliver on their promise of speed, transparency and cost — a big “if.” Lingham, for one, remains skeptical: “The Apples, Googles — the world’s largest companies — are using U.S. dollars still. When they switch over to Bitcoin, then we can have that conversation.”
Men With Guns
Crypto utopians often imply that fiat currencies like the U.S. dollar are just a social convention with nothing behind them — since 1944, at least, when the dollar became untethered from gold. But that isn’t quite true, according to Krugman:
“Ultimately, it’s backstopped by the fact that the U.S. government will accept dollars as payment of tax liabilities — liabilities it’s able to enforce because it’s a government. If you like, fiat currencies have underlying value because men with guns say they do. And this means that their value isn’t a bubble that can collapse if people lose faith.”
A Lesser Role For Crypto?
Assuming for the moment that Bitcoin will not supplant the U.S. dollar as the world’s reserve currency anytime soon: Is there a positive, if reduced, role for cryptos and blockchain technology vis-a-vis global debt? IIF’s Riddle told Cointelegraph:
“Crypto doesn’t play a role currently, however technology solutions like blockchain could one day potentially be used to increase debt transparency globally.”
Those solutions could be, for example, the private sector lending to the most vulnerable low-income countries, “or any type of lending.” According to the IIF, “Greater transparency will in turn facilitate good governance, aid the fight against corruption and support debt sustainability.”
Public debt recorded on a blockchain could make it easier for lenders and borrowers both to evaluate emerging risks associated with debt, avoiding problems like the recent Tuna Bonds scandal in Mozambique, where that nation’s government failed to disclose $1.2 billion in loans to the IMF as required under a funding accord.
In sum, while debt ratios are historically high, they still may not be signalling imminent global collapse. Moreover, one shouldn’t count on Bitcoin replacing the U.S. dollar as the world’s reserve currency anytime soon or if ever, according to some. But, in the near and intermediate future, there are still some useful ways crypto and blockchain technology can impact global debt, such as supporting lending transparency in emerging markets.
Governments World-Wide Gorge On Record Debt, Testing New Limits
An enormous pile of savings makes it possible for nations to borrow heavily at low cost, defying worries about inflation and sustainability.
The pandemic has pushed global government debt to the highest level since World War II, surpassing the world’s annual economic output. Governments, especially in rich countries, are borrowing still more, partly to erase the damage of Covid-19.
Advocates say the spending, also encouraged by new economic thinking about debt, could usher in a period of robust global growth, reversing the malaise many wealthy countries have felt this century. But if those theories are off-base, the world could be saddled with debts that can be absorbed only via inflation, high taxes or even default.
Either way, the combination of huge debt and markets’ lack of concern is unprecedented. The U.S. government is on course for a budget deficit of $3 trillion for the second year in a row. Despite that and fears of inflation, 10-year Treasury bonds are yielding only around 1.33%, partly because of the Federal Reserve’s caution about raising its interest rates.
Japan’s central-government debt is about to surpass a quadrillion yen, or nearly $10 trillion. Even with total public debt of over 250% of gross domestic product, Tokyo spends no more on interest each year than it did in the mid-1980s, when public debt was around two-thirds of GDP.
Perennial debt champion Greece is adding to its pile, and investors are accepting even lower yields on its bonds than on U.S. Treasurys. Even some developing nations, such as India, are touting the virtues of higher government borrowing, with no discernible backlash from markets.
“The world has changed. The intellectual frameworks have evolved,” said Paul Sheard, a research fellow at the Harvard Kennedy School and former chief economist at credit-rating company S&P Global. “We don’t need to worry” about debt.
New economic thinking has encouraged politicians to borrow big by emphasizing how borrowing conditions have evolved since fiscal caution was the orthodoxy in the 1980s and 1990s. Globalization, aging populations and conditions in China have combined to create a world awash in savings available to invest.
A large part of those savings has sought protection from an uncertain world by gobbling up safe assets—principally the government bonds of advanced economies—regardless of tiny yields.
Like flat-screen TVs, the more inexpensive government debt becomes, the bigger it gets. The U.S. has led the world with aggressive government borrowing to power recovery from the pandemic. Even before this year’s stimulus measures, the Congressional Budget Office projected that federal debt held by the public would reach 102% of GDP by the end of 2021, the highest level since just after World War II.
Economists at JPMorgan argue that even the U.S.’s energetic borrowing will barely make a dent in global gross savings, which are worth more than $25 trillion a year, according to the International Monetary Fund, and whose rise has depressed borrowing costs in recent decades.
“There’s something that saves the advanced economies from that pickup in debt we see, and it’s the low debt-servicing costs,” said Elena Duggar, associate managing director of credit strategy and research at Moody’s Investors Service.
Critics say the U.S. spending plans are excessively big, risking an overheated economy and a lasting rise in inflation and interest rates. They fear the Fed is trapped in a policy of low interest rates that encourages excess and risk. Higher U.S. rates and a rising dollar could also cause trouble for developing countries with high dollar debts.
Charles Goodhart, a former member of the Bank of England’s monetary policy committee and an emeritus professor at the London School of Economics, warns that the tide of global savings that has kept borrowing cheap could recede in coming years. He fears governments might be learning the lessons of recent history, including the weak recovery from the 2008 financial crisis, just as that era is ending.
“The generals are always fighting the last war,” he said. “Governments didn’t do enough before, so they’re going to overdo it this time.”
World-wide government debt increased to 105% of global gross domestic product in 2020 from 88% before the pandemic, according to the Institute of International Finance, an association of global financial firms. Total government debt could rise by an additional $10 trillion this year to reach $92 trillion, with most of the increase happening in developed economies, the IIF says.
It is a stark contrast to the aftermath of the global financial crisis, when many countries soon switched from stimulus to deficit-cutting.
Greece’s traumatic crisis, which nearly forced the country out of the eurozone, seemed to highlight the risks of debt. Now, even Greece is finding that it is possible to ratchet up debt, thanks to low borrowing costs that the European Central Bank helps to keep in check.
“The change is that there is no obvious ‘sinner,’ ” said former Italian finance minister Pier Carlo Padoan, now chairman of Italian bank UniCredit. “After the financial crisis, there was a blame game. Covid was an exogenous shock. A huge policy response was necessary.”
From Rome to Tokyo to Washington, governments have decided to seize the opportunity and spend their way out of the Covid-19 slump. Stimulus measures not only aim to erase all traces of the downturn as quickly as possible, but also to invest in long-term economic renewal.
Since the beginning of the pandemic, Japan has poured in the equivalent of some $800 billion in economic stimulus, or one-sixth of its annual output, according to an estimate by the Peterson Institute for International Economics, a Washington think tank.
Hundreds of billions in additional spending are on the way, yet inflation in Japan remains at zero. The spending includes both one-time payouts and investments in digitalizing government and expanding renewable energy.
Most global policy makers and economists now believe that advanced economies’ tilt to fiscal retrenchment from 2010 onward contributed to the slow recovery from the financial crisis, leaving lasting scars by driving businesses under and people out of the workforce.
Austerity, painfully stringent in parts of Europe, didn’t even cut government debt as a proportion of GDP effectively, because weak growth and low inflation weighed down GDP.
This time, the economic case dovetails with political calculations. The political establishment in many developed countries maintains that fiscal belt-tightening and weak growth contributed to the populist backlashes of the past decade.
From one perspective, if the private sector has excess savings, those savings will get absorbed by government deficits. The savings include the cash hoards piled up by tech companies, which often don’t need to make the huge investments in factories and machinery typical of 20th-century big business.
China, other Asian nations and oil-producing countries in the Middle East have added to the savings stash by running large trade surpluses and putting much of the proceeds in U.S. Treasurys and other industrialized nations’ bonds.
Former U.S. Treasury Secretary Lawrence Summers argued in 2014 that aging populations, high savings and weak private investment are persistent trends of our era that make it hard for economies to operate at their potential, a problem he dubbed “secular stagnation.” The theory implies that governments have to pick up the slack.
“If you look at the path of global fiscal policy, it’s a massive bet on the secular stagnation hypothesis. It’s a bet on a massive private savings glut and investment dearth for a long time to come,” Mr. Summers said in an interview.
The danger for governments is that the structural forces of the past three decades might be about to go into reverse, said Mr. Goodhart, the former Bank of England policy maker.
In a recent book, “The Great Demographic Reversal,” he and co-author Manoj Pradhan single out a potentially epochal shift. In the past few years, the global working-age population has begun to fall as a share of the total world population and to decline in absolute numbers in the most globalized regions of the world, including North America, Europe and East Asia.
After the end of the Cold War, the integration of China and the former Soviet bloc into the capitalist global economy brought a vast and growing labor supply, they say. That held down wages and inflation in developed countries and injected into the global economy the savings of a burgeoning middle-aged Chinese population that lacked a government safety net.
But as aging populations in China and other nations spend more of their savings, average interest rates will rise higher than governments have bargained for, Messrs. Goodhart and Pradhan argue. “China’s greatest contribution to global growth is now past,” they write. “This great demographic reversal will lead to a return of inflation.”
Mr. Goodhart says he hopes their predictions are wrong. If central banks in advanced economies have to raise interest rates to fight inflation, governments could be forced to make politically painful decisions to raise taxes and cut spending.
Mr. Summers, a former official in Democratic administrations, has surprised many people this year by becoming one of the loudest critics of President Biden’s spending plans because he is worried about inflation in the U.S. He says the administration’s spending plans exceed any plausible estimate of the amount of slack in the U.S. economy.
But even Mr. Summers and like-minded economists think Europe’s spending is justified. The International Monetary Fund has expressed concern that the euro currency area’s combined deficits of around 7% of GDP are too small given the size of the economic hit from Covid-19.
Inflation per se isn’t necessarily a problem for governments with big national debts. It means that GDP and tax revenues grow bigger in nominal terms, while the size of existing debts stays fixed. Inflation helped Western countries including the U.S. and U.K. reduce their debt burdens after World War II.
Even somewhat higher interest rates might not be a problem given how little governments are paying in interest now. Central banks would be happy to lift rates to a more normal level, ending their drift toward zero in modern times, since that would give them more flexibility to cut rates in a recession.
The key to debt sustainability is the relationship between interest rates and growth, says Paul De Grauwe, a London School of Economics professor and one of Europe’s most prominent economists. So long as a country grows faster over time than the rates it pays, its overall debt ratio tends to decline naturally, he says.
If interest exceeds growth, on the other hand, danger awaits. To stop the debt ratio from rising endlessly, governments might have to raise taxes or allow high inflation to melt the debt away. If investors balk at high inflation, borrowing costs could rise further. Central banks might have to raise rates, testing their independence, because politicians don’t like seeing the economy squeezed.
One reason government debt binges have a bad reputation is the experience of developing nations that lurch from one default to another. These cases, however, typically involve countries borrowing in currencies they don’t control, such as the dollar.
Two big emerging countries—China and India—are matching the developed world in their eagerness to issue debt in their own currencies.
China has run budget deficits of around 11% last year and 10% this year, according to the IMF. Its huge domestic savings and limits on capital movement mean it doesn’t have to worry about footloose foreign creditors fleeing.
India’s finance ministry this year used its annual report to advocate a big increase in public debt in rupees, saying this could supercharge growth. “Risk-taking via public investment can catalyze private investment and unleash a virtuous circle. It will crowd in private investment, rather than crowd it out,” the report said.
India ran a budget deficit of nearly 10% of GDP in the year ended in March thanks to a stimulus package worth hundreds of billions of dollars. The government says it is helping keep the economy humming and tax coffers full.
“The crisis is extraordinary and challenging, but we hope our revenue collection will be more than satisfactory,” said Finance Minister Nirmala Sitharaman in an interview.
Almost all economists agree that government debt cannot rise forever without causing trouble. There is also widespread agreement that high levels of debt can be safe if it is inexpensive, perhaps higher than was conventionally thought 20 years ago. The $90 trillion question is how high it can go.
“There are still limits to government debt,” said Mr. De Grauwe. “They are just much further out than we used to think.”