It’s no secret that government debt is a problem, and servicing that debt in a rising interest rate environment will force politicians to make the sort of hard choices they usually avoid.
But what about debt on the grand scale – globally, and including not just government IOUs but private debt as well?
Turns out that mountain of red ink is gigantic and getting more expensive to service than ever:
The total owed by households, businesses and governments stands at $290 trillion, up by more than one-third from a decade ago, according to research by the Institute of International Finance.
Although the world’s debt has declined from a pandemic-driven record early this year, the risks it poses to economies and financial markets are intensifying. That’s because many borrowers face a relentless increase in their interest payments, as the Federal Reserve and other central banks raise rates at the fastest pace in decades to subdue inflation. [emphasis added]
A pile of debt that is $290 trillion – with a “T” in size. And it’s less than it was just a few years ago. So…good job everyone? Not really:
This year’s surge in borrowing costs may add to the ranks of businesses that only earn enough cash to service their debts—sometimes labeled “zombie companies,” even though they employ lots of people and produce goods and services that consumers want. By some measures, about one-fifth of publicly traded corporations already fit that definition when interest rates were low. With debt costs now surging, more companies are likely to join them. And some that were already in the zombie category may go bust.
“This looks a lot to me like the internet bubble,” Scott Minerd, global chief investment officer at Guggenheim Investments, said on Bloomberg Television. Even though plenty of companies now are making money, “we have a lot of companies that aren’t.”
Worldwide, Moody’s Analytics Inc. reckons that default rates on what it calls “speculative grade” debt—what the financial world calls “junk”—will almost double next year. In the $6.7 trillion market for high-grade US corporate bonds, there are signals that defaults could be by far the worst of the past five decades, according to an analysis by Barclays Plc.
Markets will sort the zombies from the live and kicking. But it won’t be pretty or painless. Real dislocations will occur – losses of jobs, capital, and more:
The extent of the damage is likely to depend on how high central banks push interest rates. A quickish victory over inflation, or a decision to settle for prices that are somewhat above target, would allow them to stop tightening. For now they look set to keep going, while the full impact of what they’ve already done has yet to hit.
“Before they get to the destination, I think it’s likely that they are going to create a lot of damage to the economy and financial markets,” Minerd says. —With Jill R. Shah and Finbarr Flynn.
That’s a rather gloomy scenario for what might await the global economy. Is it set in stone? Of course not. Markets being massively complex systems, precisely predicting their courses and outcomes is, at best, a hunch based on a guess resting on a pile of assumptions.
History, however, tells us that greater debt, and debt service, creates instability. Instability leads to all sorts of problem – social, political, cultural on top of economic issues. The U.S., apparently, is in a better situation than many countries when it comes to debt. But that’s also a race to the bottom – and one we should never run.
The obvious, and painful, solution is to get a handle on spending. Did I say that was painful? You bet it is – particularly in an economy, like ours that is so dependent on individual spending (never mind government).
But if it’s true we’re the best of a bad global bunch, that also means the U.S. has the ability to change course and avoid zombie status. For now. The alternative is blindly shuffling right over the fiscal cliff.
The opinions expressed in this article are those of the author and do not necessarily reflect the positions of American Liberty News.
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Rerun 1930s Depression X1000
The only “leadership” that’s going to happen in this country involves we, the people, taking our country back.
COS – Convention Of States – is gaining momentum, but needs everybody on board. It doesn’t need to cost anybody one red cent. Just your vote will do.
Check into it, because if we don’t start doing something ourselves, that festering swamp in D.C. is never gonna’ get drained.
the comments in the story are a waist of time. Address the debt by who the very people who created the debt. this is the fox guarding the hen house
the backer of the Great Reset figure they have the answer. They’ll KILL all the old folks who have pensions to the pensions won’t be underfunded any more. (might we start with Congress?