The Global Debt Reckoning Includes China as Well

It has been incredibly challenging for governments and societies to operate within the COVID-19 pandemic this year. The world’s top central banks have had to adopt more than just accommodative policies. The trillions and trillions of economic stimulus ultimately have to be paid for by some means. Now the whole world seems to be drowning in debt.

A global debt report from the Institute of International Finance (IIF) even dubbed it “Attack of the Debt Tsunami.” If that doesn’t sound very encouraging, it’s not supposed to.

To date, the financial markets and the governments and central banks have ultimately continued to offer that support for the endless waves of debt.

According to the IIF report, global debt has risen by more than $15 trillion since the end of 2019. This is a new record, and the world’s debt at the end of the third quarter of 2020 was estimated at $272 trillion.

This massive pile of debt is expected to keep growing as well, while governments and the public respond to the pandemic. The IIF now forecasts that total global debt will reach $277 trillion by the end of 2020. That figure is said to represent some 365% of gross domestic product (GDP).

For an idea of just how much debt this is, note that U.S. real GDP rose 2.3% in 2019. The U.S. government’s calculation for the current-dollar GDP was up 4.1% in 2019 to a level of $21.43 trillion.

China also saw its debt surge in 2020, with a shift moving from all government borrowing to nonfinancial corporate debt. That measurement has China all-in debt at 335% of GDP, and the nonfinancial corporate debt rose to about 165% of GDP. China’s total debt was shown to be 302% of GDP at the end of 2019.

Back in October, the IIF issued a release calling for public and private sector cooperation to shape a coordinated and effective global response to the crisis.

Even over the summer, the IIF was making similar comments about global debt levels by citing a spike higher in global debt ratios under pandemic-driven recessionary conditions. Debt in mature markets was shown to have reached 392% of GDP, with the largest increases seen in Canada, France and Norway. Emerging market total debt also was up to 230% of GDP earlier in 2020, and that was said to be driven largely by nonfinancial corporate debt in China.

There is a substantial burden on households in this mix as well. Back in March, at the peak of the global COVID-19 panic, the IIF showed a tally of global household debt being above $47 trillion. This was referenced as being more than $12 trillion higher than that total household debt was heading into the 2008 global financial crisis. The IIF further showed that over three-quarters of the 75 countries in its sample now have higher household debt-to-GDP ratios than they did in 2007.

Earlier in November of 2020, the U.S. Treasury’s official figure of federal government debt was more than $27.2 trillion. That does not even account for federal employee retirement benefits, social security or Medicare obligations.

While the global debt is far more than just what governments owe, these sums are becoming very difficult to justify without serious thought about how the debt levels can be managed in the years ahead. Another issue is what would happen if interest rates were ever allowed to revert to historical levels, rather than in a world where interest rates are close to zero percent in the United States and where negative interest rates are now the norm in Europe and Japan.

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