Central Idea

Record High: The Institute of International Finance (IIF) reported that global debt reached an all-time high of $307 trillion by the end of June 2023, marking an increase of about $100 trillion over the last decade.
Debt-GDP Ratio: After seven consecutive quarters of decline, global debt as a share of gross domestic product (GDP) has started rising again, reaching 336%.

Understanding Global Debt

Global debt encompasses borrowings by governments (sovereign), private businesses, and individuals.
Governments borrow to cover various expenses and pay interest on past debts, while the private sector borrows primarily for investments.

Historical Trend: Both nominal global debt and the debt-to-GDP ratio have been steadily increasing over the years. The pandemic briefly halted this trend as economic activity slowed, but debt levels have been on the rise again.
Advanced Economies: Over 80% of the first-half increase in global debt came from advanced economies like the U.S., the U.K., Japan, and France. Among emerging markets, China, India, and Brazil saw substantial debt growth.
Surge Amid Rising Interest Rates: Despite expectations of declining demand for loans due to rising interest rates, global debt increased by $10 trillion in the first half of 2023. This trend is not unusual as increased savings often lead to higher debt levels when channelled into investments.

Unique Trend: More intriguing than rising debt levels is the preceding seven consecutive quarters of declining global debt as a share of GDP before 2023.
Inflation’s Role: The IIF attributes this decline to price inflation, which allowed governments to erode their debts denominated in local currencies through inflation. This process, known as inflating away debt, involves central banks creating new currency to pay off government debt, indirectly taxing the economy through rising prices.

Debt Sustainability: Rising global debt levels often raise concerns about debt sustainability, especially in the case of government debt driven by reckless borrowing for populist programs.
Impact of Rising Interest Rates: As central banks raise interest rates to combat inflation, governments with heavy debt burdens may struggle to service their debt. Rising rates could lead to defaults or attempts to inflate away the debt.
IIF Warning: The IIF warns that the global financial infrastructure is ill-prepared to handle unsustainable domestic debt levels.
Private Debt Concerns: Rapidly increasing private debt levels also raise alarms as they are often linked to unsustainable booms that can culminate in economic crises, particularly when such lending lacks genuine savings.
Looming Financial Crisis: The 2008 global financial crisis serves as a recent example of an economic boom fueled by easy credit policies, such as those by the U.S. Federal Reserve, preceding an economic downturn.

The surge in global debt warrants attention, given its potential implications for economic stability, sustainability, and the capacity of financial systems to address mounting debt challenges.