Why global debt catastrophe fears are wrong

Debt spirals, doom loops and default danger – pundits fret all of these and more as US federal debt tops $40 trillion. They see profligate politicians and climbing long-term interest rates soon rendering the world’s largest economy penniless. Europe and Japan are not much better off, they claim.

The facts argue otherwise, however. Measured correctly, global debt is down over the last decade. Yes, down. That does not mean I crave more government debt. I’d prefer less. Nor does it mean politicians and bureaucrats spend wisely. They don’t. They spend foolishly compared to ordinary people and businesses. But the current debt phobia is misplaced.

Debt worriers often spotlight whatever debt category seems most outrageous. Sometimes they harp on about credit card debt. Other times it is municipal bonds. Sometimes it is a business sector, like private credit. Often it is the federal debt – like now. Their cries crescendo when debt hits big round numbers. Hence the eruption this summer when US federal debt breached the $40 trillion mark.

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Without context, those big round numbers are meaningless. To see debt correctly, first look globally. Then scale those huge numbers. Through that lens, total global debt of all types combined has fallen nicely compared to global gross domestic product. Worldwide government, corporate and household liabilities total 246 per cent of global GDP, down from 2020’s 285 per cent peak. Today’s total matches 2016’s and nears that from 15 years ago.

How did that happen? Partly, central banks’ Covid-era monetary madness created massive inflation. While that is painful for consumers, it makes existing debt cheaper to repay and increases the tax base. Hence, since 2020, global public debt-to-GDP fell from 111.5 per cent to 95.6 per cent. Corporate debt-to-GDP slid from 106.6 per cent to 93.3 per cent. Household debt sank from 69.8 per cent to 59.8 per cent.

Shockingly, the world could add another $42 trillion in debt before reaching 2020’s debt-to-GDP peak. Notably, even that level did not wreck GDP.

Initially, US government debt appears daunting. Stripping out debt one federal agency owes another, federal debt-to-GDP is around 100 per cent. In 2010, it was about 60 per cent. Hence the pundits’ dread.

But that overlooks other categories. US corporate debt barely budged relative to GDP. Household debt plunged from nearly 100 per cent of GDP in 2010 to 67 per cent now – mostly offsetting government debt’s rise. Headlines ignore that.

From a financial stability standpoint, federal government debt taking share of the shrinking global debt pie from households is positive. Governments can tax and/or inflate away debt partially to avoid crisis. Households simply default. It is riskier for any economy to have too much household or corporate debt than it is to have similarly excessive government debt. Simply said, since 2010 the riskier kind of debt fell in relative size while the less risky kind grew. Overall, American and global debt situations improved.

Even within dreaded government debt, good news exists. US municipal and state debt is riskier than America’s federal debt, as neither states nor cities can inflate their way out of financial woe. In 2010, US municipal and state debt combined were 21 per cent of GDP. Now they comprise just 11 per cent.

The bottom line in the US and globally: after the 2008–2009 and 2020 recessions, consumers, businesses, municipalities and states overall wised up. Sovereign governments did not. That is better than the other way around.

Some complain that US federal interest payments are climbing alongside bond yields. True. But tax receipts still cover interest five times over. Interest was a similar share of tax revenue in the late 1980s and early 1990s. GDP boomed. Debt payments’ portion of federal spending fell as the boom inflated tax receipts. History is rife with countries enduring sovereign debt burdens far worse than the US's now.

Global debt service is inexpensive, too. Even in France, the current poster child for debt doom. The French government spends only 10 per cent of tax on interest – below that of the UK and Italy. None of that is alarming.

This is not some historical tipping point. It is partly a normalisation. Interest rates have returned to levels common before central banks’ foolish quantitative easing programmes artificially squashed them. Since 1926, 10-year US Treasury yields averaged 4.7 per cent. Today’s 5 per cent yield almost matches that. Yields often more than doubled today’s in the 1980s. The same goes for France and the UK. That did not prevent economies and stock markets from soaring.

I don’t want more government debt. Nor am I defending politicians who lack the spine to corral spending. But prognostications of a global debt catastrophe are fiction. Do not waste your time, emotions or money on them.