Last year, the global debt burden eclipsed $233 trillion across all borrower classes. That number also showed increases relative to GDP in nearly every category, broken down both by nation and by type of borrower.
Any way you slice it, global debt is at an all-time high. It’s particularly unsettling, however, to note that a growing proportion of national governments are overleveraged, led by — you guessed it — the United States. If states take on more debt than they can reasonably afford, the citizens of those countries will feel the impact.
How did we get here?
The general principles of economics as they relate to debt don’t change all that much, whether we’re talking about individuals, companies or nations. Debt should ideally be taken on only to make ends meet in the short term or to finance valuable longer-term investments that have some clear payoff.
As the United States’ alarming $21 trillion national debt figure demonstrates, however, most countries have come to accept the notion that constantly rising debt is to be expected and not necessarily fought. With that said, it’s taken some time to amass an international debt that drastically outstrips GDP.
“Debt creep” is a phenomenon in which an entity runs a deficit (modest or not) for many consecutive time periods. As this cycle compounds, the total debt load piles higher and higher due to heightened absolute interest bills and inflation. The United States, for instance, has owed money for a long time. In 2001, however, the federal debt was only $6.9 trillion, which was around half of that year’s GDP. Today’s national debt has exploded to $21 trillion, which actually exceeds our total output each year.
Who owes all this money?
While the United States $21 trillion represents a massive chunk of total debt owed by governments worldwide, it almost looks inconsequential in relation to the $233 trillion number that describes the sum of all debt. This figure is comprised of several categories, of which government spending is one of — but not the- largest.
The Institute of International Finance (IIF) pegs that distinction as belonging to nonfinancial businesses at $68 trillion. Governments place second at $63 trillion, where they’re closely followed by financial institutions at $58 trillion and households at $44 trillion.
Among the enormous $63 trillion government grouping, the United States takes the cake in terms of sheer amount owed. Our $21 trillion federal deficit works out to represent around 30 percent of the world’s total.
Interestingly, though, while our numbers might be bigger, other nations are borrowing money more quickly and recklessly than we are. Japan and China, particularly, have seen rapid growth in the amount of debt on their balance sheets. Japan is significantly more leveraged with respect to GDP than any other nation in the world. China, accounting for over 7 percent of the total, has seen its debt skyrocket as they’ve absorbed nearly three-quarters of all the private debt issued since the 2008 financial crisis.
What could happen if we don’t curb borrowing?
Outside observers might assume that if the world’s three largest economies are borrowing at such a torrid pace, then everyone’s doing it. They’d be correct. This is a trend that has many countries addicted to the cycle it facilitates. Just because everyone may be participating, however, doesn’t make it good policy.
It’s easy to conceive of government debt as an abstraction, something that has always existed but hasn’t reared back to bite this country recently. A quick sit-down with your friend with the unhealthy credit card debt, however, can help illustrate the questionable path the United States and its developed counterparts are on.
Overleveraged governments run into the same problems overleveraged people do. Eventually, any institution will reach the point that its funds are eaten away by interest payments before they can be deployed to any use. To that end, the IMF has urged the United States to practice some fiscal moderation by limiting simultaneous tax cuts and stimulus spending.
If the debt-to-GDP ratio continues to swell indefinitely, it could be a matter of time before higher interest rates and higher taxes (a clear drag on growth) must be implemented to preserve some fiscal integrity.
All is not lost. The United States does have a history of being able to operate at a budget surplus. It’s just been a while since that last happened — 2001, in fact. With time and patience, debt levels can come back down to a sustainable point. It’s like getting into great physical shape. There are no secrets. Just as hard dieting and exercise lead to improvements, disciplined spending and higher revenues help pay down debt.
Although the U.S. is still the clear world leader in total borrowing, it isn’t the only country that could benefit from such advice.
If you are a college student or a young professional, you have a stake in what is happening and we encourage you to participate in the discussions to secure your financial future.
Up to Us is a student-led campaign specifically focused on helping Millennials like you to take action to achieve a fiscally sound future for yourself and the nation. It raises awareness on campuses about the negative effects of shortsighted fiscal policies that can impact students’ futures. To learn more, visit www.itsuptous.org.
Originally published at http://www.itsuptous.org/blog/united-states-and-global-debt-picture.