A new report that was published by CNN has revealed that governments are now in debt up to $91 trillion — yes, you read that correctly — an amount of cash that is almost equal to the size of the whole global economy. The report then goes on to speculate that if this problem is not properly addressed soon, this debt is going to obliterate populations.
If you were hoping for good news, well, I’m sorry to disappoint you. We’re currently living through a very rough period of human history. Granted, there are lots of points in time where this could be said, but when the whole planet is experiencing hardship, well, that tends to make things a bit different.
So what is the cause for this dramatic spike in debt burden for the governments of the world? The coronavirus pandemic is one huge reason why things are currently so damaged economically speaking. These increasing debt burdens are now posing a threat to living standards in wealthy areas, including the U.S.
via CNN:
Yet, in a year of elections around the world, politicians are largely ignoring the problem, unwilling to level with voters about the tax increases and spending cuts needed to tackle the deluge of borrowing. In some cases, they’re even making profligate promises that could at the very least jack up inflation again and could even trigger a new financial crisis.
The International Monetary Fund last week reiterated its warning that “chronic fiscal deficits” in the US must be “urgently addressed.” Investors have long shared that disquiet about the long-term trajectory of the US government’s finances.
“(But) continuing deficits and a rising debt burden have (now) made that more of a medium-term concern,” Roger Hallam, who serves as the global head of rates at Vanguard, which is one of the world’s biggest asset managers, said in a conversation with CNN.
As debt burdens mount around the world, investors are growing anxious. In France, political turmoil has exacerbated concerns about the country’s debt, sending bond yields, or returns demanded by investors, soaring.
The first round of snap elections Sunday suggested that some of the market’s worst fears might not come to pass. But even without the specter of an immediate financial crisis, investors are demanding higher yields to buy the debt of many governments as shortfalls between spending and taxes balloon.
With the cost of debt servicing increasing, there will be less economic materials available to provide public services or to respond to crises like financial meltdowns, future pandemics, or wars. And since government bond yields are then utilized to help price other debt — think mortgages — an increase in yields means that there will be higher borrowing costs for both households and businesses, which puts the smack down on economic growth.
“As interest rates rise, private investment falls and governments are less able to borrow to respond to economic downturns,” the report said. “Tackling America’s debt problem will require either tax hikes or cuts to benefits, such as social security and health insurance programs, said Karen Dynan, former chief economist at the US Treasury and now professor at the Harvard Kennedy School. ‘Many (politicians) are not willing to talk about the hard choices that are going to need to be made. These are very serious decisions… and they could be very consequential for people’s lives.'”
Economics professor with Harvard University, Kenneth Rogoff, is in agreement that the United States, along with other nations are going to have to make some sort of adjustments in order to address what’s happening. And these changes are going to be very, very painful for the American people.
Rogoff told CNN that debt is “not free anymore.”
“In the 2010s, a lot of academics, policymakers and central bankers came to the view that interest rates were just going to be near zero forever and then they started thinking debt was a free lunch,” he explained.
“That was always wrong-headed because you can think of government debt as holding a flexible-rate mortgage and, if the interest rates go up sharply, your interest payments go up a lot. And that’s exactly what’s happened all over the world.”’
CNN then revealed that here, in the U.S., the federal government will end up spending a whopping $892 billion during the current fiscal year on interest payments alone. That’s actually significantly more than it has already earmarked to be spent on our national defense and is approaching the budget set aside for Medicare.
Next year, interest payments will top $1 trillion on national debt of more than $30 trillion, itself a sum roughly equal to the size of the US economy, according to the Congressional Budget Office, Congress’s fiscal watchdog.
The CBO sees US debt reaching 122% of GDP a mere 10 years from now. And in 2054, debt is forecast to hit 166% of GDP, slowing economic growth.
So how much debt is too much? Economists don’t think there is a “predetermined level at which bad things happen in markets,” but most reckon that if debt hits 150% or 180% of gross domestic product, that means “very serious costs for the economy and society more broadly,” said Dynan.
With all of this knowledge about the current financial crisis facing the entire planet, one would assume President Joe Biden would have a plan for addressing it. You’d be completely, totally wrong about that. Not even during the most recent debate with former President Donald Trump did Biden reveal any sort of solution for the problems facing the American people in the shadow of this massive economic downturn.
The United Kingdom isn’t doing much to help fix the problem either.
“Regardless of who takes office following the general election, they will — unless they get lucky — soon face a stark choice,” Institute for Fiscal Studies director Paul Johnson commented just last week. “Raise taxes by more than they have told us in their manifestos, or implement cuts to some areas of spending, or borrow more and be content for debt to rise for longer.”
Countries trying to tackle the debt issue are struggling. In Germany, ongoing infighting over debt limits has put the country’s three-way governing coalition under enormous strain. The political standoff could come to a head this month.
In Kenya, blowback over attempts to address the country’s $80 billion debt burden has been much worse. Proposed tax hikes have sparked nationwide protests, which have claimed 39 lives, prompting President William Ruto to announce last week that he would not sign the proposals into law.
But the problem with putting off efforts to rein in debt is that it leaves governments vulnerable to far more painful disciplining by financial markets. The United Kingdom offers the most recent example in a major economy. Former Prime Minister Liz Truss triggered a collapse in the pound in 2022 when she tried to force through big tax cuts funded by increased borrowing.
Which means that the UK’s economy is being “pounded” — wink, wink — into oblivion and things will probably get worse.
How many experts tried to warn the globe that putting strict measures on the spread of COVID would end up having massive, negative impacts on the economy? You can’t shut down businesses for long periods of time, force people to wear masks, which becomes so burdensome folks would just rather not go out, and expect that things will just go back to the way they were before without any issues.
That ain’t how this works.
Actions have consequences.
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