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The Looming Global Debt Crisis: A Ticking Time Bomb

The Looming Global Debt Crisis: A Ticking Time Bomb
June 11, 2024

The world is facing an unprecedented debt crisis, with global government debt reaching a staggering $315 trillion in the first quarter of 2024. This alarming figure represents a new all-time high, with debt increasing by $1.3 trillion in Q1 alone. The situation is particularly dire in emerging markets, where debt has skyrocketed to $105 trillion, with China leading the charge. Developed markets, such as the US and Japan, have also contributed significantly to this mounting debt burden.

The global debt-to-GDP ratio has surged to an astonishing 333%, just shy of the record high of 362% set in 2021. Governments around the world seem to be relying on debt as a “solution” to their economic woes, but this approach is unsustainable and potentially catastrophic.

In the United States, government spending as a percentage of GDP has reached 43%, matching levels seen during the 2008 Financial Crisis and just 1% below the levels witnessed during World War 2. This spending spree is occurring despite the Federal Reserve’s claims of a soft landing and strong economic data. The reality is that the US is in the midst of a crisis, with over half of American adults believing the country is in a recession and consumer sentiment at rock bottom.

The cost of servicing the US national debt is becoming increasingly burdensome. The average interest rate on $34.6 trillion of Treasury debt is now 3.2%, the highest since 2010, while $5.9 trillion of the national debt is in Treasury Bills with an average interest rate of 5.4%. A record $9.3 trillion of national debt is set to mature within the next 12 months, and even if the Fed cuts rates by 1-2 times, this debt will have to be refinanced at much higher rates. Annualized interest payments have already surpassed $1 trillion for the first time in history, and the US government desperately needs rate cuts to manage this growing expense.

Corporations are also feeling the strain of high interest rates, with 264 companies repeating a default for at least the second time in January. The share of repeat defaulters is at its second-highest level since the 2008 Financial Crisis, and the number of defaults in 2024 is rising at its fastest pace since 2008. As interest rates remain elevated, the corporate default rate is expected to continue climbing, putting many companies at risk.

Despite the looming debt crisis, foreign investors continue to pile into US markets, with foreign holdings of US securities hitting ~$27 trillion in 2023, near the all-time highs seen in 2021. Since 2009, foreign investments in US markets have skyrocketed by 180%, driven by the S&P 500’s impressive 573% gain during this period. Foreign investors’ share of the $78 trillion US equity market has risen to an all-time record of ~17%, highlighting the growing importance of US markets on the global stage.

The world is sitting on a ticking time bomb of debt, and the consequences of inaction could be severe. Governments must take steps to address this crisis before it spirals out of control, but the path forward is uncertain. One thing is clear: the global debt crisis is a looming threat that cannot be ignored, and its resolution will have far-reaching implications for the global economy.

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