The world’s drowning in debt — brace yourself for economic turbulence
Opinion by Desmond Lachman, New York Post, 2/21/24
When it comes to a country’s overindebtedness, the four most dangerous words are “This time is different.”
As Harvard’s Kenneth Rogoff and Carmen Reinhart taught us in their magisterial book “This Time Is Different: Eight Centuries of Financial Folly,” unless addressed promptly, overindebtedness almost always ends in tears — an economic, banking or exchange-rate crisis.
How much more should we be worried about the world’s long-run economic outlook?
It’s not only a single major country with troubling debt.
Each of the world’s major economies has a serious debt problem caused by too many years of irresponsible budget policies and zero interest rates — and could make it all the more difficult to avoid a recession and renewed financial strain at home.
Take the United States, the world’s largest economy.
At a time of cyclical economic strength, when the country should be running a budget surplus, it’s managing to run a deficit of around 6% of gross domestic product.
On present policies, such deficits will continue as far as the eye can see, according to the nonpartisan Congressional Budget Office.
That in turn will take us to public-debt interest payments exceeding those during World War II in relation to the size of the economy.
Since our government borrows in dollars, there’s little chance we’ll default on the debt even if it reaches astronomical levels.
The Federal Reserve can always print money to repay it.
But there is a great chance such money printing will lead to ever-higher inflation and a dollar crisis.
Unfortunately, we have not only a public-debt problem but a commercial-property-debt problem.
Over the next two years, almost $1.5 trillion in commercial-property debt matures.
With post-COVID vacancy rates at record levels and interest rates much higher than in the days of easy money, it’s difficult to see how such debt can be rolled over without major debt restructuring.
This makes it only a matter of time before we see a wave of regional-bank defaults that could shake the financial system as Silicon Valley Bank and First Republic Bank failures did last year.
China, the world’s second-largest economy and until recently its main engine of economic growth, also has a major debt problem.
Over the past decade, credit to China’s nonfinancial private sector grew by around 100% of GDP, per the Bank for International Settlements.
That’s a larger rate of debt increase than those preceding Japan’s lost economic decade in the 1990s and the 2008-2009 US Great Recession.
With its property and credit market bubble burst, China could be well on the way to a lost economic decade of its own.
Europe’s debt problem is largely concentrated in the eurozone’s south.
Both Italy and Spain have public-debt-to-GDP ratios considerably higher than at the 2010 eurozone sovereign-debt crisis.
Complicating matters, these countries are stuck in a euro straitjacket that precludes them from using their own exchange-rate or interest-rate policy to offset the adverse effect of budget belt tightening on aggregate demand.
Another round of the eurozone debt crisis is inevitable.
As if this were not enough reason for concern, Japan, until recently the world’s third-largest economy, has a public-debt level exceeding 250% of GDP, around double that of the United States.
This hasn’t been a problem so far since the Bank of Japan has effectively been financing the government by keeping long-term interest rates below 1%.
But once rising inflation forces the bank to end its yield-control experiment, we could see a Japanese public-debt crisis.
With so many major debt problems around the globe, it’s hard to see how we avoid a day of world economic reckoning.
The world’s economic policymakers could mitigate such a day by recognizing we are sleepwalking to a world crisis and taking measures to make our debt more sustainable.
If they don’t, we should brace ourselves for economic turbulence at home and renewed financial-market strains as economic trouble abroad spills over to our shores.
American Enterprise Institute senior fellow Desmond Lachman was a deputy director in the International Monetary Fund’s Policy Development and Review Department and the chief emerging-market economic strategist at Salomon Smith Barney.