Debt of the rich
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Farmers are the worst off in the debt crisis in the developing world.
“If I become rich, I can be debt-free!” Have you ever thought of that? If someone is having this idea as an opinion or imagination, quite possibly it could be wrong. Today, the world is three-times richer than what it was at the turn of the century – about 22 years ago. World GDP has increased three-fold during the period 2000-2022, now growing above US$ 100 trillion. During the same period, the world’s public debt has increased five-fold, reaching $ 92 trillion by the end of 2022.
Public debt includes central government debt (national debt) and debt of other government agencies (such as that of public enterprises and the central banks). Debt can also be divided into two components as external debt and domestic debt. The gap between the two components matters for many countries, which do not have an international value for their national currencies.
Only the countries with an internationally accepted local currency can print money to pay off their external debt, because there is world demand for their currency. For the other countries, they must earn foreign exchange to pay off external debt, while printing local currency has no use; in fact, it would make the matters worse with increased domestic debt and the stock of money. The two groups of countries differ according to the way that they have to work in order to pay two types of debt.
Global debt explosion
According to the IMF Global Debt Database, public debt to GDP in advanced countries has increased to nearly 120 per cent by 2021 and remained above 100 per cent during the past decade. The most indebted countries among the rich are Japan with 263 per cent public debt to GDP and the US with 128 per cent public debt to GDP. Compared with advanced countries, the average for the emerging market economies remains as 64 per cent of GDP by 2021, but they have also increased it from less than 40 per cent of GDP a decade ago.
As the countries become rich, they also improve their ability to borrow more and, of course, they borrow more and more. But does it matter? Public debt means that the governments owe money to their own citizens as well as to foreign citizens. It implies that the governments exercise their legitimate power to interfere in the economy, spending more and more than warranted by the availability of resources.
There are two important matters as far as the future of the citizens of “indebted” countries is concerned. The first, they will have to rollover their debt, borrowing more to pay off their previous borrowings.
The second, the citizens will have to pay more taxes in the future because ultimately, “more debt means more taxes”. The only way to avoid this is to declare a default on debt. This would carry far-reaching bitter economic consequences, which may, perhaps, multiply into disastrous political, social and humanitarian consequences as well.
US, leading the debt race
On January 19 this year, the US Federal Government borrowings reached its self-imposed national debt ceiling of $ 31.4 trillion. The US is not only the world’s richest country by producing a quarter of world GDP, but also the world’s largest indebted country with its national debt – the accumulated outstanding borrowings by the Federal Government. The country with the second highest national debt after the US is Japan, which has $ 13 trillion national debt. But still Japan’s national debt is less than half of the US level.
US national debt was only about $3 trillion in 1980 but increased to $10 trillion in 20 years. Within the next period from the year 2000-2022, it increased to over $ 30 trillion. Over the past six months of the year 2023, the US national debt has further accumulated to $ 32.5 trillion level. In fact, it’s growing at an exponential rate. Just within the last month of June, US national debt has increased by $ 865 billion – about 10-times the Sri Lankan annual GDP.
While debt has been exploding on a global scale, the US debt has been growing all the time, exceeding the country’s debt ceiling. Over the past 70 years, the US debt ceiling has been raised 77 times by the US Congress, but it has failed to stop the running debt clock of the Federal Government.
The US government needs more money not only to meet the government’s budgetary spending, but also to repay its debt obligations. With increasing debt repayment obligations due to increased borrowings, raising the debt ceiling of the US government has been a routine procedure for the Congress, though it has often been a source of heated debate.
World’s biggest default
This time too, the Congress has approved a deal to raise the government’s borrowing limit and suspended the debt ceiling until 2025. We must also remember that the next Presidential election is in November 2024 so that the US can rewind its debt clock until the election is over.
In fact, the delay of the Congress in approving this has already created a panic mode in the markets. The Treasury had estimated that it would run out of money but could not borrow any more. For the first time in the US history, the Standard & Poor’s too downgraded the US credit rating from AAA grading to AA+ with a negative outlook due to emerging concerns about the budget deficit. The downgrading risks of the US economy have been growing in the recent past, as the issue popped up even two years ago.
Finally, with the approval of the deal allowing the US government to continue further borrowings, the Congress was said to have “prevented a potentially catastrophic default on US debt repayments” – the world’s biggest default!
It is, however, an important question that someone could ask: “How long could the potential default be avoided?” In fact, the problem was not yet over. The government securities were maturing often in big numbers, while the Treasury continued to borrow more by issuing both Treasury Bills and Treasury Bonds to finance the maturing debt obligations.
Global risks and uncertainties
The domestic and external debt components of the US debt don’t really matter, because both are in the same US dollar assets. More than 80 per cent of US national debt comprises external debt, because there is growing world demand for the US national currency, the US dollar.
While the dollar is the most-traded currency in the world, about 60 per cent of the world’s foreign exchange reserves are also held in US dollars. This implies that the rest of the world has been lending to the US, by purchasing US national debt issued in government securities, in addition to those issued by the US corporate sector as well.
The US credit downgrading and the daunting default risks have again put the entire world economy in a danger of a global crisis – a crisis that is even more dangerous than the US financial crisis in 2009, or the European sovereign debt crisis in 2012, or the COVID-led global economic crisis in 2020. It was such a catastrophic default that was averted by the US Congress by approving the suspension of the debt-ceiling and raising the borrowing limits by the Congress earlier this year.
A potential default would have ended the borrowing ability of the US Treasury along with downgraded credit rating, jeopardising the US government’s ability to finance its budgetary spending, while the US bonds traded around the world would have surged resulting in lower prices and higher interest rates. Every country – both rich and poor – that is holding onto dollar assets as their foreign reserves would have lost their asset value.
All that we have discussed lead to one final question: Is it possible for a “debt bubble” to grow forever? The answer is clear enough to understand that any bubble must burst one day sooner or later, in wiping out the global debt pile.
(The writer is a former Professor of Economics at the University of Colombo and can be reached at sirimal@econ.cmb.ac.lk and follow on Twitter @SirimalAshoka).
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