The global debt is to another record, thanks to cheap borrowing costs.
The way to enhance economic growth is to borrow more.
In the Stephanomics podcast, you can explore what’s moving the global economy.
There are zombie companies in China, soaring mortgages in Australia, another default scare in Argentina, and crippling student loans in America.
The world has a record of $250 trillion of corporate, household, and government debt. It is almost three times the global economic output and equates to $32,500 for every woman, man, and child on earth.
To keep the global economy afloat, policymakers deliberately try to use borrowing. Thus, much of the debts stem from that. The lowest interest rate for years is the burden manageable for most, so the debt mountain keeps growing.
Policymakers are trying to catch up with the slowest growth since the era. The only way for them to revive their economies is to get more dept. The Green New Deals to Modern Monetary Theory proponents argue that central banks are exhausted, and that massive fiscal spending is needed to yank households and companies out of their funk.
The reality of the situation is that getting more debts to pay debts will not help the economy. The question is how much debt an economy can carry safely.
The International Monetary Fund and ECB policymakers are urging governments to do more, arguing that it is the perfect time to borrow projects that will reap dividends of the economy.
A former U.S. Treasury and IMF Official, Mark Sobel, says that Previous conventional wisdom on advanced economy speed limits regarding debt to ratios of GDP might be changing. Major advanced economies may well be able to sustain higher debt loads thanks to the lower interest bills and markets’ pent-up demand for safe assets.
Making Global Debt Wider
The legacy of past spending as pockets of credit stress litter the globe is a constraint for policymakers.
The newly elected government of Argentina promised to renegotiate a record $56 billion credit line with the IMF. South Africa, Turkey, and others have also had scares.
American companies alone have 70% of this year’s total corporate default. According to S&P Global Ratings, Chinese companies defaulting in the onshore market are likely to hit a record next year.
Firms that cannot cover debts servicing costs from operating profits over an extended period and have muted growth prospects are called zombie companies. Bank for international companies claims that the zombie companies rose to approximately 6% of non-financial listed shares in advanced economies, a multi-decade high. It hurts both productivity and healthier competitors.
For the households, most indebted are South Korea and Australia.
The debt is hanging on the workers of the next generation too — for example, American students owe $1.5 trillion and are, of course, struggling to repay it. It makes students concentrate more on working instead of studying.
In case the debt is cheap, it might become tough to escape once the load gets too heavy. The stable economic growth is the easiest way to solve solutions, but it is not always forthcoming.