Debt-to-GDP ratios fall significantly even though sovereign lending rises to record highs. Here in the Asia Pacific, investors keep buying whatever comes to the market.
For many, sovereign debt is mysterious, impenetrable, and something that most choose to avoid knowing too much about. Reading about how bad it is getting can feel like opening a monthly credit card bill when you know you have overspent but don’t want to find out exactly how much.
But you can’t blame governments for that, as many like the US and even France, the latter in surprisingly clear English, do their utmost best to make the market and their indebtedness transparent, clear, and as liquid as possible.
Playing with Fire
Despite that, there is a certain squeamishness at looking at matters straight in the eye, even when we are picking through an ETF prospectus that invests in swatches of government debt - almost as if knowing too much might be playing with fire.
But a visualization by the Visual Capitalist shows that not is all lost in a current world seemingly awash in public IOUs.
Up and Down
Since the end of the pandemic, global debt has reached a new record high of $315 trillion - although that is contrasted by a significant contraction in the world’s debt-to-GDP ratio.
The visualization, which is based on IIF Global Debt Monitor data, says it currently stands at 333 percent, down from levels slightly above 360 percent in late 2020 and early 2021. In other words, the world seems to be working down the 21 percent increase in overall debt from the pandemic.
Chipping at Growth
But this shouldn’t be happening, at least not according to conventional and economist wisdom. A 2010 World Bank paper frequently cited online says the critical threshold whereby debt-to-GDP ratios become unhealthy lies exactly at 77 percent.
Anything above that should mean that each additional percentage point of debt would cut 0.017 percent of an economy’s growth. Given we are more than triple that level currently, the world should seemingly be stuck in some kind of economic limbo or malaise.
No Deceleration
But that has not been happening, particularly in the US, the world’s largest debt market - by far.
There, the discussion in recent years has been about slowing down an unexpectedly buoyant post-pandemic economic recovery, and its accompanying inflation, resulting in a sharp increase in interest rates in 2022 and 2023.
Unexpected Development
The Brookings Institute, a US-based think-tank, commented in early 2023 that the growth had «unexpectedly» helped lower government debt-to-GDP ratios. «However, government debt is still elevated and fragile in its composition, and the magic of growth and inflation is unlikely to last long,» it added.
But here we are - barreling headlong towards the end of 2024, one equity flash crash later, and a bank or two fewer in tow, with the Federal Reserve on the cusp of maybe, possibly, cutting interest rates for the first time in September.
No Regional Impact
Importantly, none of this seems to be cutting into Asia Pacific’s continued solid growth rates which have, in the same fashion, been eked out against very high levels of debt - topics that finews.asia has commented on at length in recent weeks (see links in text and at the top of the page).
And many seem to have a continued appetite for more of the same, as a «Financial Times» article (paywall) published on Thursday indicates. According to the publication, mainland investors have been strong buyers of government bonds, going against the central bank’s attempt to cool the market, pushing yields down as far as 2 percent.
Not Printing Money
Meanwhile, foreign investors have been cutting positions in government bonds and instead putting them into short-term mainland bank debt and currency trades, the ironic thing being that, in the case of the former, they are predominantly government-owned in any case.
Another curious aspect to all of this is that governments don’t appear to be printing money to keep growth up, as a Goldman Sachs insight from a year ago makes clear when the US money supply shrank for the first time since 1949.
Down Measurably
Accordingly, current US government statistics from July show little change in money supply measures, and most are down from the early part of 2023.
But all these measures and ratios are just that. They are good as rough indicators of the symptoms but not the cause. And maybe we just focus on the actual level of debt and ignore everything else.
The Good and the Bad
In the decades before business became dominated by metrics and a technocrat-led spreadsheet-KPI complex, it was often said, as a basic rule of thumb, that, over time, good things tended to happen to companies and governments that had little or no debt.
There might be some truth to that view. With the kinds of indebtedness we are seeing practically everywhere around the world, the global economy doesn’t have much protection from the next shock, regardless of what it may be and where it comes from.
