But if there’s too much borrowing, particularly when encouraged by misguided government policies, then households and businesses are very vulnerable if there’s some sort of economic disruption and they no longer have enough income to finance debt payments. This is when debt becomes excessive.
Yet this is what the crowd in Washington is encouraging. More debt to finance more government programs, as if there is no limit and no tomorrow.
Global debt of all types grew by $57 trillion from 2007 to 2014 to a total of $199 trillion, the McKinsey Global Institute reported in February 2015. That’s 286% of global GDP compared with 269% in 2007. The current ratio is above 300%.
See: Debt, Bubbles, and Reckless Government
The world's debt rose by $3 trillion in the first quarter of 2019 — an almost unprecedented borrowing binge that brought total global debt to $246.5 trillion. Total U.S. debt (private and public) rose to a new all-time high of more than $69 trillion — led by federal government debt, which is now over 101% of GDP.
See: The world's debt rose by an unprecedented $3 trillion in the first quarter of 2019
High levels of debt put countries in a vulnerable position in the event of a downturn and could endanger the world's economic recovery, said economists from the Institute of International Finance, which released the study today.
Artificially low interest rates are distorting economic decisions by making something (debt) seem cheaper than it really is. The bottom line is that government spending programs directly cause debt, but we should be just as worried about the private debt that is being encouraged and subsidized by other misguided government policies.
The consequences of such high and rising debt could be significant. High and rising debt will:
- Slow income growth;
- Increase interest payments, crowding out other priorities;
- Push up interest rates;
- Dampen our ability to respond to the next recession or emergency;
- Place more burden on future generations; and
- Increase the risk of a fiscal crisis.
Personal Economics 101