The most surprising part of the global debt just reached a record $307 trillion this month is that it barely made any waves. Arguably, the news remains largely unnoticed, but the data represents a sense of prudent and conservative monetary policy values gone forever.
This is evidenced by the presentation of research at the annual Jackson Hole symposium last month. The public began to rapidly lose interest in macroeconomic issues and become selectively deaf. Apart from the numbing topics of high government debt levels in various regions, geopolitical conflicts that could fragment the global trading system, and weaker-than-expected productivity growth, few people know what the real problems facing macroeconomics are today.
William Pesek
The $307 trillion debt is not a data point that is so insignificant that it can be crossed out at will. Data from the Institute of International Finance suggest that, even to a lesser extent, governments have lost ground in basic fiscal prudence.
Also lost are the rules and standards that once formed the knowledge framework that has long driven markets. Why is this? Since the '90s, the global economic system has been jumping from crisis to crisis, and the latter seems to have arrived before the ink on the previous one has dried.
The Federal Reserve, which has "priced" its liabilities, was also revealed to have laid off 300 jobs at the end of the year, its first since 2010, and the world's largest currency manipulation institution lost $57.3 billion in the first half of 2023.
Crazy trip
We can debate when this crazy journey began. Some might say that this began with the Mexican financial crisis of 1994-1995 and the collapse of Barings Bank.
Others believe it began in 1997-1998, when some developing countries in Asia also suffered financial crises, Russia defaulted and U.S. hedge funds at Long-Term Capital Management collapsed.
Then came the bursting of the dot-com bubble in 1999-2000, the terrorist attacks on the United States on September 11, 2001, and of course the Great Reckoning on Wall Street in 2008; Then it's Europe's turn, where the region's 2009-2010 debt mess scared markets around the world; In 2013, the "taper tantrum" in emerging markets caused waves of volatility around the world.
In 2016, Trump was elected president of the United States, a political "black swan" event for many global investors from which they are still struggling to recover. Then, the arrival of the pandemic caught leaders and their economic ambitions off guard around the world.
One thing in common throughout these three decades has been the administration's response: waves of government bond issuance and ultra-aggressive monetary easing that both supported demand and prevented yields from skyrocketing.
Over time, governments have found it easier to put central banks in control. Arguably, first the Federal Reserve did so in the United States in the mid-90s, and then politicians in Tokyo followed suit by letting the Bank of Japan run Asia's largest economy at the time. Later, the ECB took over the baton in 1998, following the same Fed/BOJ route.
One problem with this is that most of the ensuing crises are handled by unelected central bank governors. Whenever governments do act, they borrow heavily to stabilize economic growth. Central banks then whitewash and clean up the fiscal impact of doing so.
To stabilize economic growth, governments have been borrowing heavily. IMAGE CREDIT: GETTY
In this way, treating the symptoms rather than the root causes became the norm, or you might say, the new default tactical choice.
The debt will not stop
So far, the arms race for borrowing and monetary easing is still ongoing, which explains why global debt is at $307 trillion and growing.
It's easy to get lost. We believe that top economies like the United States and Japan are naturally too big to fail. But when will the 10 most indebted economies reach the point where they are too big to save? To borrow from the movie Jaws, when we first saw the shark's physique, we knew the International Monetary Fund needed a bigger ship.
The Fed has been normalizing U.S. interest rate policy for the past 18 months. The current US benchmark interest rate is in the range of 5.25%-5.5%, and Federal Reserve Chairman Jerome Powell last week poured cold water on US officials' hopes of ending tightening.
Washington's fiscal trajectory, however, keeps a spotlight on the headwinds facing the world's largest economy. The U.S. national debt is about to reach $33 trillion, 29 percent higher than U.S. gross domestic product. To put this into perspective, Washington owes more debt than China, Japan, Germany, the United Kingdom, and France combined.
Now, Powell has hinted that his team hasn't finished raising rates yet. So we inevitably have to ask, why?
To be sure, the Fed under Powell is making up for two major mistakes. The first was in 2019, when Powell succumbed to bullying by then-US President Donald Trump. As the Fed began cutting interest rates to appease Trump, it added some unwanted stimulus to the U.S. economy.
Then in 2021, Powell's team misjudged the inflation spike, considering it "transitory." All of this has forced the Fed to be scrambled – arguably having to tighten monetary policy further to regain credibility.
However, after the pandemic, the inflation facing the US came more from the supply side than from the demand side. So President Biden's team handles it better than Powell's team when it comes to improving productivity and innovation.
It is irretrievable
IMF economist Serkan Arslanalp and University of California professor Barry Eichengreen tend to believe that public debt has increased from 40% to 60% of global economic output due to pandemic spending, and may now be at a level where aggressive debt reduction cannot be achieved at the political level.
However, the Fed is likely to raise interest rates further, which will increase the cumulative pressure on the balance sheets of businesses, banks and the US government.
Governments around the world have lost their way in fiscal prudence. IMAGE CREDIT: GETTY
In Tokyo, the Bank of Japan faces a different challenge: figuring out how to start exiting quantitative easing. Twenty-three years on, Japan, as the most heavily indebted developed country, would do well to have an exit plan.
China also faces its own debt woes – from real estate to local government financing instruments to its shadow banking sector. At the same time, modern Europe seems to have stumbled through one debt crisis after another.
The good news is that the sovereign debt catastrophe that many have warned about is yet to come. But the bad news: If disaster strikes, there are 307 trillion reasons to fear that things will spiral out of control.
The author of this article is a Forbes contributor, and the content of the article only represents the author's own views.
Translated from
https://www.forbes.com/sites/williampesek/2023/09/24/if-307-trillion-doesnt-scare-you-this-should/?sh=73ac5daa4a9f
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Image source: Getty Images
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