Global debt: The debt spiral

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  Quantumrun Foresight
• December 30, 2024

Insight summary

Global debt has surged in 2023, raising concerns about long-term sustainability, especially for emerging markets. As debt burdens grow, governments, businesses, and households face tough choices, including reduced spending on essential services and rising costs for loans and consumer goods. This trend could lead to increased economic inequality, strained international relations, and slowdowns in innovation and infrastructure development.

Global debt context

Global debt has reached staggering levels in recent years. In 2023, global debt hit a record USD $307 trillion, primarily driven by developed economies like the US, Japan, and the UK, according to the Institute of International Finance (IIF). Borrowing happens for various reasons, such as funding infrastructure, covering budget deficits, or financing new ventures. However, the growing debt levels are raising concerns about sustainability, especially for emerging markets like China, India, and Brazil, which are witnessing rapid increases in debt burdens. Furthermore, the global debt-to-GDP (gross domestic product) ratio, a critical indicator of a nation's ability to service its debt, remains high, creating long-term economic challenges.

Debt is an essential financial tool, yet it can lead to significant risks when mismanaged. Developing nations often borrow from foreign institutions like the World Bank or the International Monetary Fund to finance necessary projects that their domestic markets cannot support. While this offers immediate financial relief, it also creates future repayment obligations that can strain public resources. For instance, the World Bank's 2023 International Debt Report highlights how over 100 low- and middle-income countries are now forced to cut spending on crucial sectors like health and education to service their debt. As interest rates rise to counter global inflation, these repayment challenges are increasing the likelihood of debt distress in vulnerable economies.

This rapid surge in global debt has far-reaching consequences, not just for nations but also for businesses and households. For companies, especially those in sectors requiring heavy capital investment, managing high debt levels can reduce available funds for growth and increase the risk of insolvency. Households, particularly in lower-income brackets, are similarly impacted, as high debt forces cutbacks in essential spending. The IIF notes that household debt, including mortgages and student loans, accounted for USD $59.1 trillion of the global debt in 2023, making it a significant factor in broader economic stability. 

Disruptive impact

As governments increase taxes or reduce services to manage debt, individuals may face higher living costs or fewer public services. Additionally, rising interest rates driven by inflation will increase loan costs for mortgages, car loans, and credit cards, making household borrowing more expensive. In turn, people may prioritize debt repayment over other spending, reducing their consumption of non-essential goods and services. Over time, this could lead to lower overall economic growth as reduced consumer spending impacts industries that depend on discretionary spending.

For companies, high global debt will create challenges in accessing affordable capital for growth and expansion. Rising interest rates and reduced consumer demand could force businesses to rethink their strategies, focusing more on operational efficiency than expansion. For example, companies may cut investments in new technologies or reduce hiring to save costs. Additionally, businesses that rely on heavy borrowing, such as those in manufacturing or real estate, may find it more difficult to manage their debt obligations. This trend could lead to increased bankruptcies, mergers, and acquisitions, as financially weaker firms struggle to stay afloat in a high-debt environment.

Meanwhile, governments may need to cut spending on infrastructure, education, or social programs to allocate more resources toward servicing their debt. High public debt levels could also limit governments' ability to respond to future crises, such as natural disasters or economic recessions. Countries may also turn to international institutions, which often come with conditions such as austerity measures. This trend could further strain relations between governments and their citizens, especially if economic inequality widens due to spending cuts or tax increases.

Implications of global debt

Wider implications of global debt may include: 

• Economic inequality increasing as wealthier individuals and companies find ways to avoid debt-related financial pressures, while low-income populations face higher costs and fewer public resources.
• Political instability growing in countries with high debt levels, as citizens protest austerity measures and cuts to essential services.
• Demographic shifts occurring as younger generations migrate to countries with stronger economies to escape high debt burdens and better job prospects.
• Investment in green technologies slowing as governments and companies prioritize short-term debt management over long-term environmental goals.
• The gig economy expanding as businesses seek more flexible labor options to reduce costs in response to debt-induced financial constraints.
• Urban development projects being delayed or scaled back, leading to slower growth in housing, infrastructure, and job creation in rapidly growing cities.
• International relations being strained as debt-laden countries become more dependent on loans from powerful nations or institutions, increasing geopolitical tensions.
• Technological research and development budgets shrinking as companies allocate more funds toward debt servicing.
• Consumer spending patterns shifting towards essential goods and services, reducing demand for luxury items and reshaping business models in industries like retail and travel.

Questions to consider

• How might rising global debt affect your ability to borrow money or invest in the future?
• What changes could you make to your spending habits if taxes or interest rates continue to rise?