By the end of 2020, global debt surged the most in a single year since World War Two and reached a record $226 trillion, the International Monetary Fund (IMF) reported.
In 2020, global debt added 26 percentage points to reach 256 percent of the world’s economic output, according to updated data from the IMF’s Global Debt Database.
“Debt was already elevated going into the [COVID] crisis, but now governments must navigate a world of record-high public and private debt levels, new virus mutations, and rising inflation,” the IMF noted.
Government borrowing added slightly more than half the new debt, raising the total to 99 percent of global gross economic output; corporate and household debt added most of the rest, again setting new records. (See “Corporate Debt Load Threatens Long-Term Solvency,” 12 Jan 2021).
Among advanced economies, government debt was about 70 percent of GDP in 2007 as the Great Recession began. In 2020, it reached 124 percent, the IMF calculated.
During the same period, private debt rose from 164 percent of GDP to 178.
Government borrowing now makes up about 40 percent of the world’s debt load, the most since the mid-1960s, thanks to the Great Recession and the response to the COVID crisis, the IMF said.
Developed economies, including China, accounted for about 90 percent of 2020’s debt spike, thanks to low interest rates imposed by central banks.
In 2020 among advanced economies, public debt rose 19 percentage points against GDP, mirroring the jump in 2008 and 2009 during the Great Recession.
However, private debt in 2020 rose by 14 percentage points, about twice as much as during the Great Recession.
The reason: in the COVID era, governments supported private-sector borrowing to keep businesses and households afloat. In contrast, during the recession 14 years ago, governments’ main effort was to curb damage from a private sector that had borrowed too much.
During the COVID War, developing economies added only $1 trillion to $1.2 trillion to public debt, largely because they were constrained in the amount of money they could borrow or generate.
Emerging markets’ debt set record highs, while low-income countries’ debt load reached levels not seen since the early 2000s, when such countries were receiving aid from international financial organizations such as the World Bank and IMF.
Now, as interest rates rise and central banks end their support programs, the cost of debt will increase and “fiscal policy will need to adjust, especially in countries with higher debt vulnerabilities,” the IMF said.
“The risks will be magnified if global interest rates rise faster than expected and growth falters,” the agency warned. “A significant tightening of financial conditions would heighten the pressure on the most highly indebted governments, households, and firms.
“If the public and private sectors are forced to deleverage simultaneously, growth prospects will suffer,” the report said.
TREND FORECAST: Inflation, rising interest rates, and politicians’ and families’ inability to balance budgets will make it increasingly hard to cover interest and principal payments on debts, from households to national governments.
As the global debt bomb explodes, a growing number of households, businesses, and nations will be unable to meet their payment obligations.
Among households, that will mean more bankruptcies, more damage to credit scores, and more people with less ability to buy, crimping economic growth.
The resulting crunch will be especially hard on emerging nations, which began the COVID War already heavily in debt. Now, however, developed countries will be less able or willing to give money to rescue them, leading a growing number of developing countries to default on their debts. This in turn will spark anti-establishment and “progressive” political movements.
TREND FORECAST: We repeat the point we made in “Global Economy Faces ‘Debt Tsunami’” (1 Dec 2020): as debt levels rise and more countries default, prices of precious metals and Bitcoin will rise as people seek safe-haven assets.
As economic conditions deteriorate in these failing nations, social unrest will escalate as people take to the streets to protest against rising crime, increased poverty, lower wages, government corruption, and violence.