Problems With Global Debt

The global economy is in dubious shape.  On the one hand, global growth has been decelerating for more than a year.  Central banks have responded by lowering interest rates even more from their already historically-low interest rates.  The world’s central bankers have also signaled that more money printing is on the horizon.  Central banks in the so-called developed world may print more than €1 trillion in new money in 2020.  On the other hand, global consumers are still chugging along with their spending and equity markets are again close to all-time highs.  It is, without a doubt, a very interesting time to be watching the global economy.  

The Debt Problem

This backdrop sets the stage for the current discussion – government debt.  Government debt continues to explode around the world.  Interestingly, even with an already explosive debt problem on the horizon, some policymakers, most notably new European Central Bank President Christine Lagarde, has called for a new round in government spending to stem potential risks of a global recession.  In terms of debt, this means governments printing more money to pay for more spending, regardless of whether the additional spending improves the longer-term outlook of the globe.  Very few have suggested new taxes.

No prominent policymaker with significant influence has suggested, as of now, lowering government spending to improve governments’ balance sheets.

This leads to the question here – How will the world’s governments solve the debt problem?  Will they simply print money to cover the debt costs, potentially leading to hyperinflation?  Will they reduce spending even though more government spending is a very popular political solution to economic problems?  Will they print multiple €1 trillion coins to pay off debt?  Will they raise taxes?  Will they think of something creative to deal with the massive debt problem on the horizon?

The answer is, of course, unknown.  What seems more visible is that a Nobel Prize may very well await the economist(s) who solve, in a politically viable way, the world’s governments’ debt problems.  

Looking Visually At the Issue

With the background introduced, the following figures are looks at government debt to gross domestic product (GDP).  The expansion in debt is so eye-opening that it is hard to believe that the problem can be solved.  It will, though, have to be solved.

Conclusion

In this century, someone (or a group of individuals) will need to figure out how countries can deal with the massive amounts of debt accumulated over the past century.  The challenge is one not for the light of heart.  Massive risks face markets and policymakers regardless of how “they” end up solving the issue.  These risks, among the many others on the economic horizon, make it unsurprising that investors are looking for hedges to government currency, opting for assets such as gold or other precious metals.