By Dimitar Sabev
In 2020 and 2021, the government debt of the countries of the European Union increased by a total of €1.58 trillion, or by more than 11 percentage points of GDP in two years. This is mainly due to the destabilizing effect of the Covid pandemic; in 2022, due to the war in Ukraine and the energy crisis, the public debt of the EU will increase even more. For the US, the increase in public debt between 2019 and 2022 according to official data amounts to $.36 trillion. As a share of GDP, it has increased by 23 points in three years.
The IMF is trying to bring calmness to this race of trillions. According to the IMF's Global Debt Monitor, in 2021 the world's public debt actually declined, measured as a percentage of GDP: after an unprecedented jump to 99.8% in 2020, the following year total debt fell to 95.7%. The debt pause is explained by high inflation, GDP growth and the gradual withdrawal of fiscal incentives since the beginning of the pandemic.
But this momentary taming raises more questions than it resolves concerns. Remains the fact that in 2019 – the last “normal” year – the level of public debt as a share of GDP is still only 84.1%. At the same time, things in China seem to be getting out of control: the IMF reports a 14.3 percentage point increase in public debt over the two years. As for China's private debt, as a share of GDP it is already significantly higher than that of the US. Debt, public and private, is also growing in underdeveloped countries, where even small negative changes can deprive millions of people of their livelihoods. Last but not least, reducing debt with the mechanism of inflation does not bode well for middle-class savings or the environment necessary for investment in future prosperity.
These facts are known by the financial experts, but let’s give them broader interpretation with the help of the latest economic history. Parallels with the current situation could be found in the 1970s, when, at the height of the Cold War, there was a period of warming between the West and the Soviet bloc. In the conditions of "easy money", inflation and energy crisis, a number of socialist economies take out loans from Western banks, mainly for the purpose of industrialization and technological renewal. According to a 1982 study, between 1970 and 1979 the total "hard currency" indebtedness of the seven European CEE countries rose tenfold: from $6.5 to $65.4 billion.
Unfortunately for the debtors, after 1979 the helm of the Federal Reserve fell into the hands of Paul Volcker, who was determined to crush inflation by dramatically raising key interest rates, which reached 20% in some months of 1981. The result was much more difficult servicing and repayment of loans - not only with floating, but also with fixed interest rates, due to the appreciation of the dollar. The so-called "tequila crisis" of 1982 swept not only Mexico but also the group of non-aligned countries seeking a middle ground between capitalism and socialism. Several socialist countries also teetered on the brink of bankruptcy, which hardly predestined but certainly contributed to the fall of communist regimes at the end of the decade.
In 2022, according to Reuters data, the ten central banks responsible for the world's most traded currencies increased their key interest rates by a total of 2,400 basis points (roughly speaking, by 2.4% per year on average per G10 economy). It is expected that monetary tightening will continue in 2023 in the name of fighting inflation. From a debt perspective, this means significantly more difficult servicing: on the one hand because of higher interest payments, on the other because of the expected recession. The nations, companies and individuals who believed in the myth of easy money will be destabilized. Again, the centers of financial power will triumph.
Similar conclusions are reached by the Institute of International Finance, which, like the IMF, maintains a Global Debt Monitor. Its experts point out that global debt is actually falling at the end of the third quarter of 2022 - but this is not an "organic" decline due to repayment or GDP growth, but due to the effect of the strong dollar: the appreciation of the US currency in world markets (The Fed is raising rates!) makes debt issued in other currencies look inferior when converted to USD. Its servicing it is more of a challenge though.
The rise of global debt beyond our known limits is indisputable, which raises the question of the social consequences. How will the debt spiral affect our society?
As popular as it may be, the moralizing answer "We're burdening future generations," is not true. Debt incurred for consumption or investment has no relation to "future generations" except in an ecological sense. Today's generation draws on current material resources and also on the assets accumulated by previous generations – but not on the future. This was proven by John Maynard Keynes back in the 1930s.
Then why are we so afraid of the growing debt, both public and private? Anthropologists give a more credible answer than straight-line economists: in its intimate essence, debt represents a transfer of power. Purely economic indicators take precedence over the social and psychological dimensions of rising debt. The debtor owes not only the repayment of his obligations, with the interest, but also a certain social obedience - while he is a debtor, he is "bonded".
People with life experience know that the accumulation of money is devoid of meaning if it is not accompanied by a corresponding increase in available power - and the mechanism that ensures the connection between money and power in a democratic society is precisely debt. High debt takes away from people and nations their freedom: from people - to follow a life path and career according to their heart, from nations - to lead an independent economic policy, as the experience of Africa and Latin America with the West and China shows. None other than the "consumer" indebtedness of the population after a volatile economic cycle ("the seven fat and the seven lean years") is the basis of the slave system in Egypt, if we believe the Bible.
Back to today: As of 2019, the average US citizen owes over $90,000: on mortgages, credit cards, student and consumer loans, etc., which equates to nearly 1.5 average annual salaries. Another study found that 80% of US residents are in debt in some form. Their work, their life choices, but also their civic position are modeled by the fact that they owe money – to the big financial institutions. The same, though by smaller amounts, applies to much of the world.
If we think macroeconomically, we will realize that the world cannot "go bankrupt" - in the same way that a person cannot owe money to himself. The threat of rising debt is quite different: loss of sovereignty, undermining of the foundations of democracy, and ultimately a decline in economic efficiency. Because in the previous industrial type of capitalism, a significant portion of profits were used for investment and technological development.
In the financial capitalism we live in today, profits primarily serve to provide returns to financial investors who have invested their money in debt. Thus, the innovative capacity of the economy is exhausted, GDP rises more slowly - and the debt begins to weigh even more. However this may sound, today's socio-economic model is on a self-destructive spiral. Of course, debt-based power takes the necessary measures to protect itself from the crises it itself causes.
Human society is built on "debt", that is, mutual commitments and obligations. The beneficial influence that certain forms of lending have is also indisputable. But when debt becomes a way to take away other people's freedom, the social construct is shaken. The whole of human history can be represented as a series of conflicts between creditors and debtors. Will our time find the moderate middle ground – or hurry to tighten our seat belts for the coming clash?