For federal and state/provincial governments worldwide, the way to stimulate their respective economies at times of a financial crisis and the Great Recession has been to rev up public spending exponentially. This Keynesian economic model proved to be quite the dismal failure considering the enormous debt levels that governments have accumulated since 2007.
When interest rates starting rising, the debt servicing payments will rise astronomically. Right now, in the United States alone, the federal government will have net interest payments as its highest budgetary item as of 2022. Interest payments could exceed $1 trillion a year, even if rates move upwards by a percent.
Just how much debt did governments tack on over the past several years? According to a new study, global debt rose by $57 trillion, and authors are warning this could pose a serious threat to economies and financial markets.
A new report from McKinsey released Thursday highlighted that the global debt-to-gross domestic product ratio jumped by 17 percentage points to 286 percent. Governments in highly developed countries have borrowed immensely in order to increase demand and fund bailouts of companies and financial institutions.
“This is not as much as the 23-point increase in the seven years before the crisis, but it is enough to raise fresh concerns,” the report states. “Absent additional steps and new approaches, business leaders should expect that debt will be a drag on GDP growth and continue to create volatility and fragility in financial markets. Policy makers will need to consider a full range of responses to reduce debt as well as innovations to make debt less risky and make the impact of future crises less catastrophic.”
Although many public officials and central bankers would dismiss any suggestion that debt would hinder economic growth, report authors warn that these levels could reverse any economic recovery that could be taking place in countries like the United States, Canada, the United Kingdom, Japan and elsewhere.
“[Debt] slows the recovery, raises the risk of new crises and it limits the ability to respond to them,” the report stated. “While significant deleveraging may prove elusive for many countries, effectively managing the growth of debt — and reducing it where necessary — is an imperative.”
In the U.S., the national debt stands at nearly $18 trillion with more than $120 trillion in unfunded liabilities and expenditures. In Canada, the national debt is honing in on $1 trillion. In Japan, the national debt has surpassed one quadrillion yen. These certainly aren’t numbers to be celebrating, even if Paul Krugman is.
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