The term 'Global Debt' is included in the Corporate Finance edition of the Financial Dictionary. Get your copy on Amazon in Kindle, Paperback or Audio edition. Check for lowest price here...
Global debt is an issue that has become especially troublesome since the financial crisis of 2007-2009. Eight years following this crash and Great Recession, the planet is experience a debt problem that has never before been seen in the whole history of the world.
Total debt outside of the financial sector has increased by more than double in real dollars since the century began through 2016. By 2015, it had climbed to over $152 trillion. This figure that includes the debt of governments, households, and non financial firms continues to grow.
Global debt levels as of October 2016 reached a record setting 225% of the entire gross domestic product for the globe, per the IMF’s Fiscal Monitor semi annual publication. Roughly two thirds of the total non-financial firm debt is owed by the private sector of businesses and consumers. The balance nearly a third of the total is considered to be government public debt. While other measures have this percentage higher, the IMF claims that government debt is up to 85 percent of GDP versus the 70 percent seen in 2015.
This enormous amount of global debt has made the job of worldwide policy makers much more challenging. Central banks have found that their efforts to stimulate economies are diminishing. It is up to government fiscal policy to increase growth to try to keep up with rising global debt. So far, few countries have seen much success in these efforts.
The surge in global debt borrowing hails back to the private debt boom that occurred before the financial crisis in 2008. Corporations and consumer households within the world’s advanced economies began to retrench after the crisis. Despite this, debt deleveraging did not proceed evenly and in other cases debts continued to rise. Bad debts of banks especially proved problematic. Many of these have wound up on the balance sheets of governments instead.
The low interest rate environment that followed the financial crisis also encouraged a rising tide of corporate debt in the emerging nation markets. Private debt levels were already dangerously high in advanced countries. Now they are also problematic in such important emerging economies as Brazil and China. Both of these are rightly thought of as systemically critical in the world’s financial system.
The problem with deciding how dangerous global debt has become is there is no consensus on what percentage of debt versus GDP is critical. It is well known that financial crises are related to an overabundance of private debt in developing and developed economies. Beyond this, research has demonstrated that higher levels of debt come with lower rates of growth, even though a financial crisis may be side stepped. The IMF has been warning especially about the need for deleveraging to happen in both the euro zone area and China.
There are two more problems associated with rising debt levels. As debt increase outpaces economic output growth, more government debt equals a greater level of state involvement in the overall economy. It also guarantees a higher tax rate and number of taxes for the future.
Besides this, debt has to be rolled over regularly. The repetition of having to auction debt creates a scenario where governments face a vote of confidence on a routine basis. Should a government fail to inspire enthusiasm for its debt auction as has happened with a number of euro zone governments in past years, then the erring nation plunges head long into serious crisis.