The Alarming Rise in Global Debt!

The Alarming Rise in Global Debt!

Global government debt levels have been 
growing rapidly over the last 25 years and   are now forecast to exceed $100 trillion dollars 
by the end of this year. For developed countries,   the average ratio of public debt to GDP is 
back to where it was in 1945 – when public   debt rose above 100% of GDP after two 
world wars and the Great Depression.
  The recent surge in borrowing was driven by a 
series of shocks, first the global financial   crisis, then the pandemic and then the Russian 
invasion of Ukraine. For most of that period   interest rates were low and falling, but, since 
the Pandemic, we have seen a spike in inflation   globally, which pushed interest rates up, 
meaning that any new debt being issued is   much more expensive – but that has – in no way 
stopped governments from borrowing and spending.
  A quick glance at the news shows that even 
as rates are rising budget deficits around   the world are projected to grow. Government 
spending in most countries has been high since   the pandemic for a few reasons. For one thing, 
politicians tend to spend a lot more in election   years and 2024 was the biggest election year in 
world history where 72 countries that encompass   half of the world’s population held elections. 
Governments spent a lot to win reelection – and   newly elected leaders are now spending a 
lot to fulfill their campaign promises.
  So, what is the money being spent on? 
Globally there has been a lot of climate   change spending– which is expected to continue 
or possibly increase and in Europe we saw high   government spending to shield consumers from a 
spike in gas prices. Geopolitical tensions all   around the world mean that military spending 
is expected to grow in the coming years too.
  Last year, government spending around the 
world was the highest it has ever been   outside of a crisis – with the biggest 
driver of increased spending being the   rising interest rates on government debts.
This week, the U.S. Treasury Department saw   soft demand at a $16 billion dollar 20-year bond 
auction, which caused stocks and the dollar sell   off while Treasury yields rose. According to 
Reuters the weak auction shows intensified   investor worries about the ballooning US debt 
which could spur bond market vigilantes who   want more fiscal restraint from Washington.
This came after Moody’s downgraded the US   government’s credit rating, citing 
the growing debt and little progress   toward resolving it. The move was not a huge 
surprise as Moody’s was the last of the big   three rating agencies to take the step and had 
warned two years ago that this might happen.
  The 30-year US treasury yield rose above 
5% earlier this week and has stayed there.
  In Japan, events were even more dramatic when 
the weakest demand seen at a government debt   auction in more than a decade drove the 20-year 
government bond yield up to the highest rate in   twenty-five years. The yield on 30-year Japanese 
Government bonds climbed to the highest level   seen since that maturity was first sold in 
1999 – so an all-time record. Yields on the   40-year Japanese Government bond rose to a record 
high too – of 3.7%, which is a full percentage   point higher than at the start of April.
As the FT points out – a sharp move like that from   such a low starting point means that investors 
who owned that bond have lost almost 20 percent of   their investment in just a few weeks. To 
highlight how ugly the Japanese government   bond market is right now – we have to look at the 
less liquid bonds – which investors are keeping   well away from – for fear of being stuck in a 
difficult to sell bond as prices collapse.
  The Japanese yield curve is not just upward 
sloping — it is the steepest upward sloping yield   curve in the developed world. This means that 
longer maturity bonds pay higher interest rates.   But, in the market chaos the 35-year bond (which 
was issued as a 40 year bond five years ago) now   yields over 100 basis points more than the 40-year 
bond, (this makes no sense in such a steep upward   sloping yield curve) but the reason this is 
happening is that the 35 year bond is a lot   less liquid than the more recently issued 40 year 
bond – it’s what’s known as an “off the run” bond.   And it’s trading at a surprisingly higher yield 
because investors are so afraid of buying a bond   that might be difficult to sell. The FT describes 
this as pretty stark evidence of the evaporating   demand for longer-term Japanese debt.
This kind of drama in high-grade – developed   market government bonds – where bonds are supposed 
to be the safe asset class is an example of how   things can go wrong when investors back away 
from lending to highly indebted nations.
  Japan – today has the highest public debt-to-GDP 
ratio in the world at over 240%. This ratio   was only at around 50% of GDP in 1990. Over 
the same period the US has gone from a debt   to GDP ratio of around 40% to 100% today. So 
why have governments around the world become   addicted to debt – and can they deleverage? 
Before digging into that, let me tell you   last thirty-five years was driven by a combination 
of huge government spending aimed at reviving a   stalled economy, combined with a collapse in GDP 
growth. So, debt grew and grew, while GDP didn’t.
  Over that period there have been huge stimulus 
packages, including infrastructure spending   and social welfare spending, all in an attempt 
to end persistent deflation and low growth.
  Japan’s rapidly aging – and hyper aged – 
population is part of the problem too as   retirees demanded spending on healthcare and 
pensions, significantly adding to the debt   burden. The growing debt never caused a real 
problem over that period simply because the   government was borrowing at such low interest 
rates. The problem is that when interest rates   start to rise, Japan has to either stop borrowing 
and start paying down its debt – or its massive   borrowing will become unmanageable.
Japan’s prime minister told parliament   this week that he disagrees with the idea 
of funding tax cuts with bond issuance,   signaling caution over new government spending now 
that the nation’s borrowing costs are rising. The   surge in Japanese Bond yields highlights the 
concerns of bond investors globally about the   risks of unsustainable government spending.
These higher yields in Japan are part of a   global trend, where government borrowing 
costs in the world’s largest economies   are rising as investors question the ability of 
governments to cover massive budget deficits.
  The yield on the UK’s 30-year government 
bond spiked as high as 5.54% this week,   up 40 basis points year-to-date.
The UK is expected to post a budget   deficit equivalent to $185.5 billion dollars 
this year – which is slightly lower than last   year’s levels. They expect the budget to remain 
in a deficit through the end of the decade.
  Chinas debt to GDP has been growing 
over the last 15 years and is expected   to continue growing as the country runs 
deficits to stimulate the slowing economy.   China has for decades aimed to keep the official 
deficit at no more than 3% of GDP but has breached   that figure three times since 2020. The government 
set this year’s fiscal deficit target 4% of GDP.
  The US hit its debt to GDP record in late 1945, 
when US national debt was briefly larger than the   entire US economy. After a three-decade decline, 
by the mid 1970’s debt had fallen to around a   quarter the size of the economy. Since then it has 
been steadily growing, under both Democratic and   Republican presidents. It really took off in the 
wake of the global financial crisis where it hit   around 75% of GDP and again in early 2020 when the 
pandemic struck, it soared close to 100% of GDP.
  When you look at the chart you can see that 
debt has generally grown during time of war   or financial crisis – when unemployment 
is high, and economic growth is low.
  Overall, the US has the eighth highest 
public debt to GDP ratio in the world.
  Right before the pandemic, the US economy was 
in its longest expansion in modern history,   but, at the same time, US debt was – quite high 
and growing – which was unusual at the time as   normally that deep into an economic 
expansion – you would expect to see   budget deficits shrinking – but the US budget 
deficit was instead growing – and at a faster   and faster rate even before the pandemic hit.
In April 2020, – the federal government delayed   tax payments, meaning that money stopped 
coming in and the treasury announced that it   would borrow three trillion dollars in the second 
quarter alone. Who would buy all this debt? Well,   the Federal Reserve was the biggest buyer – 
it expanded its treasury holdings by nearly   two trillion dollars in a matter of two 
months. That month Americans received   their first stimulus checks in the mail.
The Congressional Budget Office (a nonpartisan   federal agency whose role is to provide congress 
with objective analyses and estimates related to   economic and budgetary decisions) is now 
predicting that Americas debt-to-GDP ratio   will rise from 98 percent where it is today to 
a record 125 per cent in the next decade. There   is no war or recession right now to easily explain 
the rapidly increasing pace of borrowing – and the   US unemployment rate is near an all-time low.
Because the US government has been spending   more than it collects in taxes 
since the global financial crisis,   the national debt has been growing. Even without 
President Trumps planned deficit spending – as   part of his budget – the US debt to GDP ratio is 
expected to exceed the 1945 high in nine years.
  If Trump’s One Big Beautiful Bill 
act makes it through the Senate,   The Committee for a Responsible Federal Budget, 
a nonpartisan group that favors debt reduction,   estimates that US national debt will 
reach 129 percent of GDP by 2034.
  Now, on the campaign trail – Trump claimed 
that he would not be running a massive budget   deficit – he instead said that he would 
balance the budget. [Donald Trump Clip] [I   Want to do what has not been done in 
24 years – Balance the Federal budget]
  Trump’s team claim that the legislation, 
when combined with his pro-growth policies,   will halve the US fiscal deficit from 
its current level of 6.4 percent,   to 3 percent by the end of his term.
His Council of Economic Advisers claims   the bill will boost real economic growth by 
up to 5.2 per cent over the next four years,   creating (or saving) up to 7.4 million 
jobs and raising investment by up to   14.5 percent over the next four years.
Not everyone agrees with that,   while many agree that the tax cuts might boost 
economic growth, they argue that the increased   borrowing and the inflationary effect of trumps 
trade policies will drive up interest rates on   government bonds while slowing the US economy.
The Center for American Progress, a liberal   research group, have published projections which 
assume that all of the bill’s temporary provisions   get permanently extended. They say that in such a 
scenario government debt could reach about double   the size of the economy by 2055, compared with 156 
percent without any changes to the existing law.
  The weak US Treasury auction this Wednesday 
highlighted investor fears over Americas   rising debt burden. In the lead-up to the 
vote on Trump’s Big Beautiful Bill in the   House of Representatives, the 30-year 
Treasury yield rose to 5.1 per cent, as   the price of the bonds fell. It extended its 
rise to 5.12 per cent after the bill passed   the House of Representatives by a single vote.
The recent debt downgrade by Moody’s has also been   putting upward pressure on US interest rates.
So, if every government is borrowing, who is   buying all of these government bonds? Well, 
Pension funds are amongst the biggest buyers   of government bonds because they are considered a 
safe investment. Investment funds, central banks,   other governments, and individual investors also 
buy bonds. According to the US Treasury, 80% of   US government bonds are held by Americans and 20% 
by other governments. When we look at a breakdown   of that 80% – we can see that almost a quarter is 
held by the Federal Reserve, with the rest held   by mutual funds, state and local governments, 
pension funds, insurance companies and banks.
  So, what does the US government spend all that 
money on? Well, the federal budget is divided   between mandatory spending, discretionary 
spending and interest payments on the debt.   More than 60% of the budget goes toward 
mandatory spending, which is automatic   unless Congress changes the legislation 
authorizing it. Social Security, Medicare,   and Medicaid make up 75% of mandatory spending.
About 28% goes towards discretionary spending,   which Congress has to authorize each 
year through the appropriations process.   About half of the discretionary spending goes to 
defense-related agencies and programs. The rest   is spent on things like health, education, 
veterans’ benefits, and transportation.
  About 12% of the budget goes on interest 
payments on the national debt. As you can   see this has risen over time as both the scale of 
borrowing and interest rates have gone up. This   is projected to continue rising in the future. 
Interest payments were $880 billion dollars last   year which is more than was spent on Medicare 
and the military. The financial historian Niall   Ferguson told the FT that “Any great power 
that spends more on debt servicing than on   defense risks ceasing to be a great power.”
Unless debt is paid down that $880 billion dollar   “interest expense” can be expected to grow as most 
of the borrowing was done when interest rates were   much lower than they are today – and when the US 
still had a AAA credit rating. Even if the amount   borrowed stayed the same – as old bonds expire 
and are replaced with new bonds – the interest   rate on those new bonds will be higher than the 
interest rate was on the bonds that expired.
  While nonpartisan research groups are 
estimating that Trump’s budget will   add more than $2.5 trillion dollars to 
the federal debt over the next decade,   White House Press Secretary Karoline Leavitt 
says that the Budget will actually save the   federal government $1.6 trillion dollars. She said 
“This bill does not add to the deficit. It is the   largest savings for any legislation that has ever 
passed Capitol Hill in our nation’s history.”
  The $1.6 trillion dollar figure – seems 
to refer to the spending cuts in the bill,   but it ignores the fact that the government will 
still be spending significantly more overall than   it brings in in taxes – which means borrowing at 
whatever the prevailing interest rate is. In their   downgrade announcement – Moody’s predicted that 
the US budget deficit would rise from 6.4 per cent   last year to just under 9 per cent by 2035.
So, is the Trump Administration right that   the new budget will spark growth, and 
that the US can outgrow the deficit?
  Well, during the global financial crisis, the 
US treasury issued huge amounts of new debt, a   lot of which was bought up by the Federal Reserve 
– a lot like what happened during the pandemic.   Some economists predicted huge inflation at 
the time, and businesses being crowded out of   the debt market, but that didn’t actually occur. 
Economists then started rethinking many of their   theories around how much borrowing is too much.
In 2019, Olivier Blanchard – an MIT professor   and the former chief economist at the IMF 
used his last speech as president of the   American Economic Association to put forward 
a provocative idea: In a world where interest   rates are very low – he said – governments 
can afford to take on a lot more debt.
  In a speech titled Public Debt and Low Interest 
Rates, Blanchard laid out the theory that as   long as the interest rate on government debt is 
lower than the growth rate of the economy – that   governments can tolerate a lot more borrowing than 
had previously seemed reasonable. He argued that   big government debts may not be as dangerous 
as they were previously believed to be.
  Trumps bet is that he can grow the US economy 
faster than he grows the national debt, and that   way he can move towards a balanced budget.
The worry is that his whipsaw approach to   trade policy — which has included massive 
tariff announcements followed by delays,   exemptions and reversals — has undercut 
businesses’ ability to plan and invest.
  This Friday, just hours before trade 
talks were scheduled to start with the EU,   Trump threatened a 50% tariff on EU goods 
while also warning Apple that he would   impose a 25% import tax “at least” on iPhones not 
manufactured in The United States, later widening   the threat to any smartphone being imported.
On Trumps liberation day in April, he announced   a 20% tariff on most EU goods, then halved it to 
10% for 90 days to allow time for negotiations.
  It is not obvious how huge tariffs and constantly 
changing trade policies would boost US economic   growth. There is a real risk that these policies 
are inflationary and kill economic growth – which   would mean higher interest rates on the debt than 
the current 5% rate – with no offsetting growth.
  Bond investors who lock up their money at a 
fixed rate hate inflation, as it eats into their   returns. They equally hate if the currency 
the bonds are denominated in depreciates.   The term “bond vigilante” was coined by the 
economist Ed Yardeni in the 1980s. He used   the term in a letter to describe investors who 
reacted to government policies, particularly those   perceived as inflationary or excessive spending, 
by either selling off bonds they owned – which   drove up yields – or by just declining to buy 
them. The idea was that politicians can’t mess   with the bond market and that when politicians 
get out of line the bond market reminds them   of the need for fiscal responsibility.
In the UK, Liz Truss’s proposed mini-budget   was quickly abandoned a few years ago when the 
bond market reacted badly to its announcement   and in the early 90’s the ten-year bond yield 
rose from 5% to over 8% in what was known as   the “Great Bond Massacre” over concerns 
about federal spending. Clinton political   adviser James Carville remarked at the time 
that he” would like to come back as the bond   market as you can then intimidate everybody.”
Robert Armstrong made a very good point in his   Unhedged newsletter a few weeks ago about Trumps 
plan to onshore manufacturing. Where if a big   chunk of human, financial and physical capital 
is to be deployed in manufacturing and exports,   they have to be redeployed away from what they 
are currently doing. And it is very possible that   redeployment to manufacturing and exports will 
make that capital less productive. After all,   there is a reason that this capital is not 
deployed in manufacturing today. And less   productive use of capital in the United States 
means the country gets poorer, not richer.
  Another difficulty that the US will face in 
trying to grow its way out of high debt is   that its ageing population and low birth rate 
means that the working age population is in   decline and without immigration there will be no 
one to work in all of the factories that Trumps   tariffs are supposed to bring back onshore.
Despite the claims that Elon Musk would be   able to slash two trillion dollars of wasteful 
government spending by eliminating waste, fraud,   and abuse. The DOGE website is now only claiming 
$170 billion dollars in savings, much of which has   been disputed as many of the contracts that DOGE 
claimed to have cancelled, had either already been   cancelled or would never have cost as much as 
DOGE are claiming. Research from the BBC could   only verify 32.5 billion dollars from the wall 
of receipts – which – at less than 2% of what   was promised – doesn’t do much to balance the 
budget. According to CBS there are offsetting   costs of $135 billion dollars when you add up 
the cost of rehiring mistakenly fired workers,   defending lawsuits, layoff packages and so on.
Reductions in government spending can be   factchecked by going to the Treasury Department 
website where they publish US government monthly   spending data broken down by agency and program. 
Despite the big claims, total federal spending is   about 7% higher over the last two months than it 
was during the same months a year ago – so no cost   cutting has showed up in the data so far.
Most of the research I can find shows that   Governments only cut spending in response to a 
crisis, and the problem with that is that these   forced spending cuts can be indiscriminate and 
make a financial crisis worse. The problem is that   politicians love borrowing and spending because 
the paying back comes in somebody else’s term.
  Since the turn of the millennium interest rates 
started out low and fell lower – and during that   period of declining interest rates governments 
have grown addicted to borrowing and spending   which they got away with because the low interest 
rates meant that economies could out grow the   interest rate on the debt. With US 30-year rates 
above 5% and anti-growth policies being pitched by   politicians this becomes a lot more difficult.
Trumps tariffs could of course cause problems in   other countries too. According to JP Morgan 
research – The impact of the trade war will   be focused on the U.S. but the rest of the world 
will not be immune to the damage. They say that   the trade war could reduce global GDP by 
1%. In a world with such elevated levels   of government debt – lower growth can only 
be expected to make the situation worse.
  In its October Fiscal Monitor report, the IMF 
warned about the enormous surge in public debt   over the last five years, with the global debt 
to GDP ratio now 10 percentage points above its   level on the eve of the pandemic. Their research 
showed: countries with debt that was not expected   to stabilize accounted for more than half of 
global debt and about two-thirds of world GDP.
  The UK, Brazil, France, Italy and South 
Africa were among the countries where   debt was expected to continue rising.
They said that “in countries where debt   is projected to increase further, delaying 
action will make the required adjustment   even larger” and they called for “cumulative 
fiscal adjustment” — tax rises or spending   cuts — of 3 per cent to 4.5 per cent of 
GDP to bring down debt across the world.
  They added that government spending to fund the 
transition to greener energy together with ageing   populations and security concerns were likely to 
add to fiscal pressures over the coming years.
  Governments may wish to inflate away the debt in 
the coming years where they allow high inflation   to reduce the real value of their outstanding 
debts. But higher inflation as we have seen in   recent years is very unpopular and can lead 
to governments being thrown out of office.
  If you found this video interesting, you should 
watch this one next. Don’t forget to check out our   sponsor Flexispot using the link in the video 
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Developed economies around the world have been growing their debts over the last twenty-five years. This was less of a problem when interest rates were close to zero but in the era of trade wars, lower credit ratings and higher interest rates, debt is more expensive to issue and service. Bond investors have worried that governments are addicted to debt for quite some time, and recent drama in the Japanese bond market along with the deficit spending of Trump’s “one big beautiful bill” lead many to question the ability of governments to cover massive budget deficits. This video looks at the drivers of growing government debt, what the money is spent on, can Elon Musk’s DOGE cut spending and analyze the role of the ‘bond vigilantes’, to understand if huge budget deficits and government borrowing could spiral out of control.

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