The Impossible Equation of Global Debt

Global debt has reached an all-time high of over $300 trillion. If this amount explains so many things, it is above all the driving force behind a boundless ideology in a world of risks and stakes of all kinds. At a time of revolutionizing interest rates, economic agents are seeking to reduce their debt in order to remain solvent. The financial system not only needs growth to be sustainable, but also scarcity.... Global deleveraging is unrealistic, however.

On a national scale, debt reduction can be achieved in three different ways: growth, inflation, or a slowdown in government spending. Let's take these elements one by one. In recent years, despite a sharp rise, inflation has failed to reduce overall debt levels. From the health crisis to the war in Ukraine and the many economic and social issues at stake, global debt has continued to rise.

Global growth, for its part, has remained very weak, despite catching up in 2021, and is gradually slowing as global balances are reconfigured. De-globalization and geopolitical conflicts are further obstacles, with the exception of certain specific zones such as Africa and East Asia, where demographic power is a growth driver. Finally, at a time when inequalities are reaching record levels, governments are maintaining very high levels of spending, preventing them from returning to a budget surplus. On the other hand, they could resort to taxation to raise new revenues, but the effects would be counterproductive and, above all, would have no influence on the very nature of their rising debt. Not to mention the fact that, in many countries, tax revenues are now at record levels as a proportion of wealth ... just as they were in 1939.

In the private sphere, the indebtedness of companies, both financial and non-financial, and of households, essentially depends on the international context and the programs put in place by countries and their institutions. The extremely favorable borrowing conditions of recent years, and the resulting fall in the cost of money, have naturally encouraged people to take on debt. This trend has been accentuated by innovation on the part of financial institutions, coupled with accelerated technological development. While government debt represents 97% of global GDP, household debt accounts for almost 70%, non-financial companies for around 100%, and banking and financial institutions for 80%. This situation is untenable for households and businesses, the overwhelming majority of which cannot roll over their debt like a state can, nor operate with negative equity like a central bank. The increase in business bankruptcies bears witness to these challenges.

The question then arises: is it possible, today, to carry out a major debt reduction? Looking at recent history, the years following the 2008 financial crisis have shown that it is not. In Europe, for example, despite budgetary rules imposing a maximum debt/GDP ratio of 60%, European countries have taken on even more debt. Given the growing influence of the financialization of the economy and the inability of central banks to finance the real economy, the debt dynamic has continued without a similar production of real wealth. Whereas in 2008, public debt in the eurozone stood at 65%, it is now close to 110%. This trend has been mirrored by most countries, especially developing ones, which have limited access to capital markets and therefore borrow at much higher rates. Their dependence on private creditors also imposes very complicated repayment conditions, particularly in the event of restructuring, making them all the more vulnerable. The total public debt of developing countries has risen from 35% of GDP in 2010 to 60% in 2021. While the health crisis has played an important role, it is more generally successive crises, wars and challenges of all kinds that have led to both a fall in growth and a rise in debt. Only a few countries have escaped this trend, including Jamaica, which has enjoyed a permanent budget surplus since 2012.

Today, the stakes are so high that the historic rise in interest rates is forcing governments to achieve a sufficiently high growth rate to avoid a debt spiral, which almost no country is able to do due to the international climate. The recommended solution is therefore to cut spending, as demonstrated by France's unemployment insurance reform, in order to reduce the deficit and limit this spiral. At the same time, this measure helps to maintain the confidence of economic agents and to keep the country's credit rating as good as possible (rating agencies deliver their results in April and May in particular). Debt is, above all, a social and ideological construct, not a simple economic fact. Finally, other liberticidal solutions have been proposed, such as diverting private savings into public debt, to name but one, which would obviously do nothing to change this global situation.

Since, for many countries, the exponential trajectory of debt means that interest payments are one of the first items on their budget, the main solution is for central banks to lower interest rates. This would stimulate the economy and thus growth, while reducing debt servicing costs in the medium term. The most heavily indebted countries, such as Italy, France and the UK, would still have room to maneuver for some time before they were truly strangled by their debt repayments. But the risk of such a measure, in a period of rising prices, is that it could trigger an inflationary spiral, accentuated by ongoing geopolitical tensions and successive energy crises. This situation, which is inconceivable for central bankers, would require them to keep interest rates sufficiently high until inflation is definitively contained, at the cost of a major social, economic and financial crisis. A scenario explained in previous articles.  

Faced with this impossible equation, the world is taking a tragic path, represented by the global rise in military budgets. As the economist Margrit Kennedy rightly explained: "Military production is the only area where the ‘saturation’ point can be postponed indefinitely." Put another way, war makes it possible to destroy and rebuild, thus creating growth at a time when growth is scarce, and reducing debt levels. In 2023, military spending on all continents will reach a peak of over $2.3 trillion, fuelled by war in Ukraine and the Middle East, as well as other "cold" conflicts in Taiwan, North Korea, Syria, Kashmir and the Balkans.

To halt this trend, a radical reform of the financial and monetary system is urgently needed. Gold's particular appeal in these times, and its historic role as a currency, also testifies to the more or less conscious understanding that the contemporary financial model is reaching its limits. And that tomorrow's model will have to be based on real wealth.

In this election year, when almost 70% of the world's GDP is affected by changes in leadership, this change is possible. But only if voters are informed of the urgency of the situation, and if they really want it. This is a task for everyone.