If $307 Trillion Doesn’t Scare You, This Should

The most surprising thing about news that global debt just hit a record $307 trillion is how little alarm it generated. It’s gone largely under the radar.

Yet this is not some yada, yada, yada data point to scroll past onto the next news item of the moment. These figures from the Institute of International Finance suggest that, at the very least, governments everywhere have lost the plot on basic fiscal prudence.

So have the rule books and yardsticks that once formed the intellectual framework that long drove markets. Why? Since the 1990s, the global system has ricocheted from one crisis to another, with the next one seeming to arrive before the ink on postmortems on the previous one dried.

We can debate when this crazy ride began. Some may argue things stared around 1994-1995 with Mexico and Barings Bank hitting walls. Others reckon it’s 1997-1998, when developing Asia crashed and Russia defaulted, taking the Long-Term Capital Management hedge fund down with it.

Then came the 1999-2000 dot-com debacle, the Sept. 11, 2001 terrorist attacks on the U.S. and, of course, Wall Street’s big reckoning in 2008. It was Europe’s turn next as the region’s 2009-2010 debt chaos spooked markets everywhere. In 2013, a “taper tantrum” in emerging markets sent waves of volatility around the globe.

The 2016 election of Donald Trump as U.S. President was, for many global investors, a political “black swan” event from which they’re still trying to recover. Next, Covid-19 arrived to pull the rug out from leaders—and economic ambitions—across the globe.

The common thread across these three decades is the ways in which authorities responded: bigger and bigger waves of government debt issuance and hyper-aggressive monetary easing both to support demand and keep yields from skyrocketing.

Over time, governments found it easier to let central banks take the wheel. First, arguably, with the Federal Reserve taking the lead in the U.S. in the mid-1990s. Politicians in Tokyo were happy to follow suit and let the Bank of Japan run what was then Asia’s biggest economy. The European Central Bank went the Fed/BOJ route when it grabbed the baton in 1998.

Trouble is, the crises to come were all, for the most part, handling by unelected central bankers. When governments did act, it was to churn out ever bigger waves of debt to stabilize growth. Central banks then papered over the fiscal fallout.

And just like that, treating the symptoms of financial stumbles, not addressing the underlying causes, became the norm. The new playbook, if you will.

The borrowing and monetary-easing arms race that’s still unfolding explains why global debt is $307 trillion and growing.

It’s easy to lose perspective. We think of top economies like the U.S. and Japan, naturally, as too big to fail. At what point, though, do the 10 most highly indebted economies enter the too-big-to-save realm? With apologies to “Jaws,” when we see the scale of the shark for the first time, we can see the International Monetary Fund needs an exponentially bigger boat.

The Fed spent the last 18 months normalizing U.S. rate policy. It’s currently in the 5.25%-5.5% range and Fed Chairman Jerome Powell this week threw cold water on hopes U.S. officials are done tightening.

Yet Washington’s fiscal trajectory keeps the mind focused on the headwinds bearing down on the globe’s biggest economy. The U.S. national debt is on the cusp of $33 trillion, more than 29% bigger than American gross domestic product. For perspective, Washington owes more than the combined GDP of China, Japan, Germany, the U.K., and France.

And now you have Powell suggesting his team isn’t done hiking rates. The question, of course, is why?

Granted, the Powell Fed is making up for two big errors. The first was in 2019, when Powell bowed to then-President Donald Trump’s bullying. As the Fed began cutting rates to placate Trump, it added stimulus the economy didn’t need.

Then in 2021, Powell’s team misjudged the inflation surge, buying into the spin that it was “transitory.” All this had the Fed playing catch-up—and arguably having to tighten more to regain credibility.

Yet the inflation the U.S. is getting is coming more from the supply side, post-Covid-19, than the demand side. As such, it’s better handling by President Joe Biden’s team than Powell’s with steps to increase productivity and innovation.

Nevertheless, more Fed hikes may be on the way, adding to the cumulative stress on companies, banks and Washington’s balance sheet.

In Tokyo, the Bank of Japan faces a different challenge: figuring out how to even begin exiting quantitative easing. After 23 years, it would be nice if Japan, the developed nation with the most crushing debt load, had a plan.

China, too, is facing its own dueling debt reckonings—from property to local government financing vehicles to the shadow banking sector. Modern Europe, meantime, seems to stumble from one debt blowup to the next.

The good news is that the sovereign debt catastrophe about which many have warned hasn’t come. The bad news: if one hits, the globe has 307 trillion reasons to fear things might never be the same.

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