Global Debt Catastrophe Fears Overblown: Data Shows Debt is Actually Decreasing

Amidst rising concerns over US federal debt surpassing $40 trillion, and similar worries for Europe and Japan, many pundits predict a global debt catastrophe. They point to escalating long-term interest rates and what they perceive as profligate government spending. However, a closer examination of the facts reveals a different picture: global debt, when measured correctly, has actually declined over the past decade.

While the author does not advocate for increased government debt or condone wasteful spending by politicians and bureaucrats, the current widespread debt phobia is deemed misplaced. Critics often focus on the most alarming debt categories, such as credit card debt, municipal bonds, private credit, or the headline-grabbing US federal debt figure. These concerns often intensify when debt reaches significant round numbers, as was the case this summer when US federal debt crossed the $40 trillion threshold.

Without proper context, these large figures can be misleading. A global perspective, coupled with scaling these numbers relative to economic output, provides a clearer view. Total global debt across all sectors has fallen significantly in proportion to global GDP. Worldwide government, corporate, and household liabilities now stand at 246% of global GDP, a decrease from the peak of 285% in 2020. This figure is comparable to levels seen in 2016 and approximately 15 years ago.

Several factors contributed to this decline. Central banks' monetary policies during the Covid-era, while inflationary and painful for consumers, effectively reduced the real burden of existing debt and expanded the tax base. Consequently, global public debt-to-GDP has fallen from 111.5% in 2020 to 95.6%. Corporate debt-to-GDP decreased from 106.6% to 93.3%, and household debt dropped from 69.8% to 59.8%.

Remarkably, the world could accumulate an additional $42 trillion in debt before reaching the 2020 debt-to-GDP peak, a level that did not previously destabilize GDP. While US federal debt appears substantial, when adjusted for inter-agency debt, it hovers around 100% of GDP, up from about 60% in 2010. However, this figure alone is incomplete. US corporate debt has remained relatively stable as a percentage of GDP, and crucially, household debt has plummeted from nearly 100% of GDP in 2010 to 67% currently. This significant reduction in household debt largely offsets the rise in government debt.

From a financial stability perspective, a shift of debt share from households to the federal government is considered positive. Governments possess the tools of taxation and inflation to manage their debt, whereas households typically face default. Excessive household or corporate debt poses a greater risk to an economy than equivalent levels of government debt. Therefore, the relative decrease in riskier debt categories and the increase in less risky government debt signify an improvement in both the American and global debt situations.

Even within government debt, there are positive signs. US municipal and state debt, which is inherently riskier as these entities cannot inflate their way out of financial difficulties, has decreased from 21% of GDP in 2010 to just 11% currently. This indicates that consumers, businesses, municipalities, and states have become more financially prudent following the 2008-2009 and 2020 recessions, a more favorable scenario than if sovereign governments had become less responsible.

Concerns about rising US federal interest payments due to climbing bond yields are valid, but tax receipts currently cover these payments more than five times over. This ratio is comparable to levels seen in the late 1980s and early 1990s, periods that were followed by significant GDP growth, partly due to inflated tax receipts. Historically, many countries have managed sovereign debt burdens far greater than the US currently faces. Global debt servicing costs remain manageable; for instance, France, often cited as an example of debt concerns, dedicates only 10% of its tax revenue to interest payments, a figure lower than the UK and Italy.

These figures are not indicative of a historical tipping point but rather a normalization of interest rates. Rates have returned to pre-quantitative easing levels, which were artificially suppressed by central banks. The current 10-year US Treasury yield of around 5% is close to the historical average since 1926 (4.7%), and significantly lower than rates seen in the 1980s. Similar trends are observed in France and the UK, and these higher rates did not impede economic and stock market growth in the past.

In conclusion, while the author does not endorse increased government debt or irresponsible fiscal policies, the predictions of a global debt catastrophe are unfounded. The data suggests a more stable and manageable debt landscape than commonly portrayed.