World, Debt, Greek Debt Crisis, Economy

World, Debt

The world is $277 trillion in debt so why aren't economists more worried?

The world is $277 trillion in debt so why aren't economists more worried?

11/25/2020 12:56:00 AM

The world is $277 trillion in debt so why aren't economists more worried?

Economists are keeping calm, carrying on and using war analogies to assure the public that everything will be ok.

It wasn't too long ago when austerity and cutting public spending was the only game in town. We would"fix the roof while the sun was shining" and promote economic growth by cutting debt levels, with global leaders clear that if borrowing was too high, the consequences would be severe.

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"The latest research suggests that once debt reaches more than about 90 percent of GDP the risks of a large negative impact on long-term growth become highly significant," then soon-to-be British Chancellor George Osborne said in 2010, saying that the U.K. was"forecast to break through 90 percent of GDP in just two years time."

The world is now suffering the"attack of the debt tsunami", according to the International Institute of Finance (IIF). Globally, it expects global debt to hit $277 trillion by the end of 2020, working out as 365 percent of global GDP. That's just over four times the value that worried policymakers a decade ago. There have been enough"unprecedented" events already in 2020 but this is another one, with debt never having been higher as a total number and not higher as a percentage since the aftermath of World War II.

There are now few Western economies with debt below this"dreaded" 90 percent. The U.S.'s debt-to-GDP ratio stands at just under 97 percent, The U.K.'s at around 102 percent, Italy at 158 percent and Greece at 213 percent. There are a number of exceptions in the West - Germany, Australia and The Netherlands being the major ones - but they are exceptions.

Newsweek subscription offers >British Chancellor Rishi Sunak is delivering a spending review where he is expected to outline further government increases in spending while trying to cut anything seen as not vital to the U.K.'s long-term prosperity. British debt has just crossed over £2 trillion ($2.7 trillion) for the first time and is likely to increase while COVID restrictions remain. Despite the fact debt has increased from around £1.2 trillion ($1.6trillion) in 2010, Sunak will not be returning to the"austerity" rhetoric of Osborne a decade ago.

"Governments should accelerate spending pretty much at any cost"While austerity was nothing new, the 90 percent figure came from Prof. Carmen M. Reinhart, now chief economist and vice president at the World Bank, and Prof. Kenneth Rogoff, a Harvard University economist and chess Grandmaster. In a widely shared Harvard paper in 2010, they argued that"median growth rates for countries with public debt over roughly 90 percent of GDP are about one percent lower than otherwise; average (mean) growth rates are several percent lower." Essentially, if a country's debt is too high, it makes economic growth more difficult, they argued.

"The numbers behind that [Harvard research] were found not to be correct," Ian Stewart, chief economist at Deloitte UK, tellsNewsweek."I don't really know what the 'right' ratio is. Japan's ratio is over 200 percent. I'm not advocating that but they've been able to live with it.

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"The debt is a manageable problem. That's not to say there are significant risks associated with the accumulation of debt - the most obvious being governments seeking to reduce the real burden of debt by inflating it away or defaulting on their debts or you have a debt crisis requiring significant austerity - but financing costs are vanishingly low."

The Harvard research waspicked apart by a graduate studentin 2013 at a similar time as then European Union commissioner Olli Rehn and Republican Paul Ryan were both quoting the 90 percent debt-to-GDP limit to support their austerity strategies. There were a number of omissions and inconsistencies in the data which Reinhart and Rogoff addressed in a New York Times op-ed, saying"there is no rule that applies across all times and places ... Nowhere did we assert that 90 percent was a magic threshold that transforms outcomes, as conservative politicians have suggested."

Trading on Wall Street was halted immediately after the opening bell in March as stocks posted steep losses following emergency moves by the Federal Reserve to try to avert a recession due to the coronavirus pandemicJOHANNES EISELE/GettyThe research has been widely discredited but the view behind it was not a new one. In the 1970s, then-British Prime Minister James Callaghan gave a speech saying that"spend[ing] your way out of a recession and increas[ing] employment by cutting taxes and boosting government spending" was not a sensible one and would lead to high inflation.

Are we in an age where this view has been discredited so far that a modern version of Keynesianism, the theory of high spending to promote growth, is now something practiced by most developed economies while they sustain debt-to-GDP ratios above 100 percent?

"It's not useful to think of debt as good or bad," economist Ethan Ilzetzki, an associate professor at the London School of Economics (LSE), tellsNewsweek."Debt serves the purpose of allowing countries and people the chance to do things at a time of their choosing rather than when the income comes in. This is exactly the sort of time public debt is designed for - war, pandemics, massive recessions.

"Governments should accelerate spending pretty much at any cost, given the current circumstances because of the depth of the recession we're facing and worry about the consequences later on."These direct consequences are difficult to pin down. But one possibility is an increase in diplomatic tension within the European Union and specifically within the eurozone of countries sharing the euro currency. Debt in Greece and Italy is particularly high and Greece has already

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been through a number of bailoutsfrom both the International Monetary Fund (IMF) and the eurozone economies. This predates COVID but the current situation has placed increased pressure on countries."People have been asking for a long time about Greece," Sir Kim Darroch, former U.K. permanent representative to the EU and former U.S. ambassador, tells

Newsweek."In one sense, that seems to have gone away but the question still remains: how is Greece ever going to pay that debt back?"The growth in southern European economies like Spain, Portugal and Italy still looks pretty anemic and you have to wonder at those set of economic challenges. Then you've got the set of political challenges, like in Hungary and Poland, so there are some deep stresses in the EU."

The link between the rise of populism or far-right parties and depression is one written through the history books - Nazism rose to prominence because of the Great Depression, the rise ofMarine Le Penin France and the election of Polish President Andrzej Duda are seen as a direct result of the 2008 financial crisis. This is something leaders are keen to avoid this time around.

Within COVID, EU leaders agreed a €750 billion ($890 billion) to provide grants and loans to countries worst affected by the pandemic. This effectively means EU budgets double for at least three years. Read more: Newsweek »

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There is no taxpayer money, there is only public money. Who's $277 trillion in surplus? It is not money that matters It is more money Money has zero intrinsic value! Its a fictitious economic tool, a marketing lubricant, a social sieve. There is no debt, there is no natural interest. Do not hoard resources. UBI SinglePayer

Because for every $ of debt, the world also has 1 $ of financial assets, so the world's net debt is zero, and its net worth equals its total NONfinancial assets. Wait I'm confused. Are bank deposits debt? TooManyEmmas the planet: I'm curious how someone like Jeff Bezos has 190 Billion dollars, it's not cash stacked up in a room. How can they really include assets as wealth

Debt to who? Because it's not their money. Worrying ship sailed off a while ago. Money is imaginary. Clear the slate and start over. Crazy but think about it. Don’t worry; they’ll print more. Who does the world owe money to? Because the majority of global stock is already owned by the uber rich. Uh, My debt cancels your debt. The money that you gave to me was the money that I gave to him to give to you? Laurel and Hardy did that about a century ago. Slim.

I can’t believe we owe Mars that much because fiat currencies are a thing.