The value of the global economy is estimated at $101 trillion. And the debt of governments (and, consequently, of taxpayers) around the world amounts to $91 trillion. It is an unbearable burden, which will also affect future generations. And what is most worrying is that this is a problem that has no easy solutions.
With half the world’s population set to go to the polls this year, power-hungry leaders and candidates have largely chosen to ignore the issue of public debt. You won’t hear about it in the Biden-Trump showdowns in the US. You won’t hear about it in the French election campaign, or in Britain, where polls open tomorrow morning. It wasn’t on the agenda in India or any other country large or small holding elections this year. In fact, in most cases we’re seeing the gains of those promising tax cuts and spending increases, which could (if implemented) even trigger a new financial crisis.
Free loan is over
The IMF warned last week that “chronic fiscal deficits” in the US must be “addressed urgently”. Investors have long shared this concern about the long-term debt trajectory of the world’s strongest economy. And that is because it is clear that the era of “free” loans, i.e. zero interest rates, is irrevocably over.
Investors who a few years ago…paid countries like Germany to lend to them (by buying their government bonds at negative interest rates) are now demanding a higher interest rate to lend to governments. And the longer they see them letting their deficits and debts grow, the more they will demand.
Impact on our pockets
Yields have risen on both US and eurozone bonds, with pressures strongest in countries showing signs of indiscipline. The high cost of government borrowing has a direct impact on our pocketbooks. Because the answer to this problem may at some point necessarily involve raising taxes, reducing public spending or “cutting” planned support measures.
In our loans and development
And the impact doesn’t stop there. Government bond yields are also used as a “guide” for the rest of the debt. Higher yields mean higher borrowing rates for households and businesses. And as the debt burden increases, the blow to economic growth is not long in coming. As interest rates rise, private investment and consumption fall.
Painful adjustment
Kenneth Rogoff, an economics professor at Harvard University, warned CNN that the US and other countries will need to make painful adjustments. “In the 2010s, many academics, politicians and central bankers were convinced that interest rates would remain near zero forever and so they began to think of debt as a free lunch,” he noted. “This has always been a flawed mindset. We also need to think of public debt as a floating-rate loan and realize that if the interest rate rises too suddenly, interest payments increase. That is exactly what has happened around the world,” he explained.
The conspiracy of silence
In the United States, the federal government will spend $892 billion this fiscal year on interest—more than it estimates it will spend on defense and about the same amount that goes to Medicare, health insurance for retirees and the disabled. Next year, interest payments will exceed $1 trillion on debts of more than $30 trillion. The Congressional Budget Office estimates that the U.S. public debt will rise to 122 percent of GDP in 10 years, and will have jumped to 166 percent of GDP by 2054, acting as a drag on economic growth. On the campaign trail, no one says what that will do. The candidates are content to blame each other for who caused it.
Social unrest and attacks on the market
As long as we sweep the problem under the carpet, it will act as a fuse, igniting fires and causing explosions. The first ones come at the social level. Kenya is a prime example. Proposed tax increases aimed at reducing debt have sparked mass protests against the government, which have been drowned in blood. At least 39 people have died. The country’s president, William Ruto, announced last week that he would not sign the plan into law.
In other cases, we have a boom in the markets. This was indicative of Britain in 2022, when Liz Truss’s fiscally incomprehensible programme triggered a direct attack by the markets that almost led to the collapse of the country’s pension funds. In France, yields rose momentarily when Emmanuel Macron called a snap election, but then stabilised amid speculation that even if Jordan Bardela of the National Rally were to become the new prime minister, he would not want to derail the country fiscally. And that would hurt Marine Le Pen’s chances of being elected president in 2027.
Everything will be decided next Sunday, in the second round of the elections, where all the results seem to be open to debate. No one can say who will be the next French government. But it will certainly have to ensure, among other things, that the growing fiscal deficit is paid.