Global Debt Listening Test 4

Global Debt Transcript

TRANSCRIPT: Hello, and welcome to today’s lecture which will be about Global debt. I’ll start today’s lecture with a definition of global borrowing, then I’ll look at recent data concerning how global debt has hit an all-time high. After this I shall explain how individual countries borrow money to finance their economies, then I’ll discuss Blanchard’s theory of how global debt is sustainable. Following this I’ll look at the present situation of rising inflation and then I’ll finish with a summary of my key findings.

So, let’s start with a definition of global debt. Global debt refers to the sum of gross debt of public and nonfinancial private sectors measured using annual nominal GDP statistical data across 190 countries. For today’s lecture we’ll look at government borrowing, which is often referred to as public debt, but can also be called government debt, national debt or sovereign debt. This is the financial liabilities of the government sector. Public debt allows governments to raise funds to grow their economies and is often the preferred method of financing rather than increasing taxes. This public debt is measured as debt-to-GDP ratio which compares its country’s debt to its total economic output – its GDP. The ratio tells us how a country’s economy is doing and allows us to compare it to others. According to the World Bank (2020), the critical point of public debt is when its debt-to-GDP ratio is 77% or more. Many countries are already over this threshold with Japan at 266%, the US at 128% and the UK at 94.9%.

Ok so that’s a definition of global borrowing and how it’s measured. Now let’s move onto recent data trends. I think it’s important to note that recent data has revealed that global borrowing has reached an all-time high. As governments have tried to stabilize their economies in the wake of a global health crisis, public and private debt has risen to $226 trillion worldwide, a staggeringly high debt level which has not been felt since the repercussions of World War II. The Economist (2020) states that between April and June of 2020, the US borrowed $3tn, which is the highest sum ever borrowed in a single quarter whereas in 2021, the UK borrowed £321.8bn, the largest amount in any financial year in UK history. As inflation rises and governments continue to try to mitigate the impacts of the pandemic, surprisingly some experts actually believe that increasing levels of borrowing and debt could actually be sustainable.

We’ll look at this sustainable statement a little later in the lecture but let’s now discuss how global borrowing works. So, global borrowing is necessary when a government spends more than it receives in income from taxes, resulting in a deficit, which could raise debt to astronomical levels, as seen in the UK, whose debt according to Statista (2022), currently stands at 94.9% of GDP. Government borrowing is usually done through government bonds, which is a type of investment whereby money is loaned to a government in return for an agreed rate of interest so that it can be used to raise funds for new projects or infrastructure. These bonds can be bought by a number of sources including investment banks, private individuals, a country’s central bank and foreign governments, and usually from established and developed economies to keep risks low. Yet, as borrowing has become easier over time, governments in both developed and developing countries have borrowed excessively leading to high inflation, and therefore higher prices. For low-income countries, they are not given the same interest rates as developed countries who have a rich history of borrowing on foreign markets and therefore have higher borrowing costs. Just to note here. It is really in the best interest of any emerging economy to be able repay their debts so to create a solid foundation for future investment opportunities. Defaulting on a repayment has a number of serious implications regarding international markets and the effect it can have on a country’s government and population.

Ok, now let’s look at why borrowing has increased so significantly. One of the main reasons for the increase in borrowing was the financial crisis of 2008. The Economist reports that between 2007 and 2017, in emerging markets, public debt grew from 35% to 48% of GDP whereas for advanced economies, it rose from 74% to 105% of GDP, forcing many governments to resort to strict austerity measures such as spending cuts and raising taxes in order to lower budget deficits. This actually weakened the economy even further, as not enough revenue was made from taxes. However, in 2020, the International Monetary Fund’s (the IMF) former chief economist; Olivier Blanchard argued that public debt is sustainable when interest rates are lower than GDP growth, and even a country with a debt of more than 130% of GDP such as Italy, would remain sustainable even if its debt grew to 170% of GDP, and without the need for spending cuts or tax increases. Put simply, Blanchard and many other top economists argue that growth is the key factor here and countries can quite literally grow themselves out of their current debt crisis without any fiscal cost. Although this idea has been warmly welcomed by many, there are many critics who state that external political factors, environmental disasters or global health pandemics could alter that possibility significantly. They also cite that Blanchard’s theory is only plausible if interest rates stay low. If they rise, many countries around the world will be in big trouble.

So, that leads me onto what is actually happening now. Two years on from the onset of the Covid-19 pandemic, attention is now shifting towards inflation and interest rates. As demand continues to outstrip supply while the global economy aims to recover from a volatile period, inflation is now at such a high level. Data from Trading Economics (2022) shows that the US had an inflation rate of 4.7% in 2021 and presently this rate has increased to 7.9% and in the UK the inflation rate was 2.1% in 2021 and is now 7%. This has caused several countries to increase their interest rates by 0.25% with more increases yet to come. Countries around the world are desperately trying to limit the impacts of higher inflation which leads to a much higher cost of living in terms of food, travel and energy prices. The recent rise in crude oil from $54 a barrel in 2021 to $119 a barrel in March 2022 has also added to inflation with the IMF stating that a 10 percent increase in global oil price typically increases domestic inflation by 0.4 % in the short term. Many governments are now worried of what is termed ‘stagflation’ which is rising inflation and rising unemployment. This can send a country into recession.

Let’s now finish off with a summary of what I’ve talked about today.

Global debt refers to the sum of gross debt of public and nonfinancial private sectors measured using annual nominal debt-to-GDP ratio.  Global world borrowing has hit a new time high of public and private debt amounting to $226 trillion worldwide. In terms of global borrowing, it is done through many processes, but generally advanced economies tend to pay lower interest rates than emerging economies. A former chief economist of the IMF, Olivier Blanchard has argued that global debt is sustainable as long as countries continue to grow. However, inflation, the cost of living and crude oil is all rising leaving the world in an unknown territory and only time will tell us the true outcome.

Thank you.

Written by C. Wilson (2023) / Spoken by S. Jackson

Reference list

Briançon, P., (2020). Ex-IMF economist Olivier Blanchard: Fiscal cost of virus may reach ‘levels unseen’ [online]. Available at: https://www.fnlondon.com/articles/ex-imf-economist-olivier-blanchard-fiscal-cost-of-virus-may-reach-levels-unseen-20200518 [Viewed 15.04.2022].

The Economist, (2020). Public Debt: how much is too much? [online]. Available at: https://www.youtube.com/watch?v=AaS3ywvuuTQ [Viewed 18.04.2022].

IMF (2022). Oil Prices and Inflation Dynamics: Evidence from Advanced and Developing Economies. [online] Available at: https://www.imf.org/-/media/Files/Publications/WP/2017/wp17196.ashxv  [Viewed 01.03.22].

Statista (2022). Debt as GDP UK 2022 | Statista. [online] Statista. Available at: https://www.statista.com/statistics/282841/debt-as-gdp-uk/  [Viewed 17.04.22].

Trading Economics (2022). Inflation Rate – Countries. [online] Tradingeconomics.com. Available at: https://tradingeconomics.com/country-list/inflation-rate  [Viewed 16.04.22].

World Bank (2020). Finding the Tipping Point – When Sovereign Debt Turns Bad. SSRN Electronic Journal, [online] Available at: https://elibrary.worldbank.org/doi/abs/10.1596/1813-9450-5391  [Viewed 18.04.22].