Is Another Debt Crisis On the Way?
The world does not seem to face much risk in the short term. But in the medium to long term, rising income inequality, exacerbated by the mismatch between skills and jobs in the digital age, will become a significant impediment to growth, unless policymakers implement a wide array of difficult structural reforms.
WASHINGTON, DC – Economic growth is accelerating across most of the world. Yet the world’s total gross debt-to-GDP ratio has reached nearly 250%, up from 210% before the global economic crisis nearly a decade ago, despite post-crisis efforts by regulators in many important economies to drive the banking sector to deleverage. This has raised doubts about the sustainability of the recovery, with some arguing that a rise in interest rates could trigger another global crisis. But how likely is that to happen?
To answer this question, one must recall that debt is both a liability and an asset. In a closed economy – and we don’t owe anything to non-Earthlings – overall debt and the corresponding assets necessarily cancel each other out. So what really matters is the composition of debts and liabilities – or, to put it simply, who owes what to whom.
High public-sector debt, for example, signals the possible need for tax increases – the opposite of the tax legislation being advanced by Republican legislators in the United States – and/or higher interest rates (real or nominal, depending on monetary policy and inflation). If debt is owed largely to foreign lenders, interest-rate risk is compounded by exchange-rate risk.