Global Debt Reaches New High—What It Means for World Economy

According to a report released by the Institute of International Finance on November 14th, global debt reached a staggering high of $250 trillion, rising $7.5 trillion in the first half of 2019.  The expectation is that global debt will reach $255 trillion by the end of 2019. The primary contributors to this statistic are the U.S. and China, who account for 60% of the increase.

The reason why the global debt has grown at such a rate it has is because of extremely low interest rates, which make it easy for individuals and companies to borrow more money—which in turn generates more money circulation within an economy.  Many major economies—including Japan, Sweden, and Switzerland—have even turned to negative interest rates.  In practice, negative interest rates incentivize people to spend as opposed to pay for their money to be saved in a bank.  According to U.S. Federal Reserve Chair, Jerome Powell, this type of monetary easing is not sustainable in the long-run and could signal towards a global recession if fiscal policy (taxes, government spending) were to remain the same.  The reason for this is because decreasing rates is a mechanism to fend off a recession, but with already low rates, this gives central banks little to no flexibility in the event adjustments are needed to be made.

This has sparked major concern for investors, as many economists are speculating that increasing debt could lead to a global recession.  The International Monetary Fund (IMF) warned last month that around $19 trillion in corporate debt (40% of total) could be considered “at-risk” of not being paid off in the event of a global recession.  IMF data also listed 32 countries considered to have  “unsustainable” debt—an extremely bad sign going forward.  

With regional debt crises already looming in Africa and becoming increasingly close in other areas of the globe, it could already be too late.  Regardless, countries need to start recognizing their mutual interest in working together by taking preventative measures to avoid a full-on global debt crisis.  By tackling structural issues and avoiding borrowing to budget finance deficits, the situation could at the very least be restrained in the coming years.