Reports by the Institute of International Finance (IIF), a global consortium of financial institutions, say that the collective debt of countries worldwide has surged to $305 trillion, representing a substantial $45 trillion increase compared to the pre-COVID-19 era.
The first quarter of 2023 witnessed a substantial $8.3 trillion growth in the international debt stock, nearly cresting at $305 trillion. The synergy of heightened debt volumes and the ascent of interest rates has increased the costs of managing these debts, shedding light on issues surrounding using leverage in the financial industry.
In 2022, approximately $120 billion was introduced into the debt repository of developing markets, pushing it to an unparalleled peak of $3.6 trillion. When measured in nominal USD, global debt saw a roughly $4 trillion reduction in 2022, reaching slightly below the $300 trillion threshold, the IIF says.
The most substantial sovereign debt accumulations in recent years have been attributed to the governments of the world's three largest economies: the US, China, and Japan. This represents a significant departure from historical trends, media sources express.
Sputnik lays out the significance of global debt and the debt profiles of specific countries, identifies the highest debt accumulators, and discusses their implications, providing various insights.
What is Global Debt?
The World Economic Forum describes global debt as the cumulative monetary/financial liabilities that governments, corporate organizations, and individuals hold.
Within the context of the world's $305 trillion debt stock, corporations have gulped up $161.7 trillion - 53 percent, governments are liable for $85.7 trillion - 28 percent, and individuals account for $57.6 trillion - 19 percent, the Institute of International Finance noted.
What is National Debt?
The US Treasury describes it as the sum of the government’s borrowed funds to offset the lingering balance of costs accumulated over time. In a particular fiscal year (FY), when expenditures (e.g., funds earmarked for infrastructure projects) surpass income (e.g., revenue derived from federal income taxes), a budgetary shortfall ensues. The federal government secures loans to bridge this deficit by issuing marketable securities like:
Treasury bonds are government-issued debt securities with maturity periods of 20 or 30 years. These T-bonds accumulate interest regularly until maturity, when the investor receives a principal amount equivalent to the face value.
T-bills are a limited-term debt obligation endorsed by a government, with a one-year or briefer maturity.
T-notes are securities that come in maturities of 2, 3, 5, 7, and 10 years, with interest disbursed every six months.
Floating-rate notes are government-issued securities lasting for two years, yielding interest amounts quarterly until maturity. These interest fluctuations are pegged to the discount rates established in 13-week Treasury bill auctions.
Treasury inflation-protected securities are financial instruments whose principal value is modified in response to fluctuations in the Consumer Price Index. These bonds distribute interest payments every six months and are available for 5, 10, and 30 years.
Therefore, national debt materializes as these loans are aggregated, including the corresponding interest obligations owed to the investors who procured these assets. The national debt expands as recurrent deficits frequently occur in government finances.
Which Country Has the Biggest National Debt?
The United States national debt totals about $32.8 trillion owed to creditors and currently ranks at the top of the global debtor's list. Washington’s debt burden has heightened concerns shrouding its fiscal habits and borrowing costs. To provide some perspective, the United States currently owes as much money as the total debts of the following three nations on the list of highest debtors as of August 2023, namely China ($15.6 trillion), Japan ($11.3 trillion), and France ($3.4 trillion).
What is the Debt-to-GDP Ratio?
A country's debt-to-GDP ratio, which evaluates the magnitude of its debt compared to its economic capacity, is a significant marker of a government's financial viability. Any measurement surpassing 100 percent indicates that a country is exceeding its income with its expenditures.
By evaluating a country's indebtedness against its economic performance (production), the debt-to-GDP ratio offers insight into its potential to fulfill its financial obligations.
Top 10 Countries with the Highest National Debt vs. the Debt-to-GDP Ratio
Countries | National Debt (in trillion USD) as at August 2023 | Debt-to-GDP Ratio (in %) as at 2022 |
United States | $32.8 trillion | 121.68% |
China | $15.6 trillion | 77.1% |
Japan | $11.3 trillion | 261.29% |
France | $3.4 trillion | 111.06% |
UK | $3.4 trillion | 102.64% |
Italy | $3.2 trillion | 144.4% |
India | $3.1 trillion | 83.13% |
Germany | $3.0 trillion | 66.54% |
Canada | $2.2 trillion | 105.11% |
Brazil | $1.9 trillion | 85.91% |
Source: Statista
Why is the US in so Much Debt?
1.
American Revolutionary War Debt (Late 1700s): During the late 1700s, as a result of the American Revolutionary War, the United States found itself burdened with a debt that had grown to over $75 million by the start of 1791.2.
Land Sales and Budget Cuts (Early 1800s): In 1835, the debt decreased due to the sale of federally-owned lands and austerity measures implemented in the federal budget.3.
Economic Depression (Early 1800s): Shortly after the reduction, an economic downturn triggered a resurgence in the national debt.4.
American Civil War (1860s): The national debt experienced an astonishing increase during the Civil War, soaring over 4,000% from $65 million in 1860 to approximately $2.7 billion by the war's end in 1865.5.
Early 20th Century Debt Growth: The US federal debt continued to increase into the 20th century, reaching approximately $22 billion after funding World War I.6.
Afghanistan and Iraq Wars: Last year, the Defense Department reported direct expenses exceeding $1.6 trillion for the wars in Iraq, Syria, and Afghanistan. However, a study by Brown University researchers, which factored in indirect costs like veterans' support and the interest on borrowed funds for military funding, revealed a significantly higher total cost—nearly $6 trillion for all of America's "War on Terror" efforts following September 11.7.
2008 Great Recession: The 2008 global economic downturn led to a growth in debt levels as the government initiated stimulus programs and interventions to restore economic stability.8.
COVID-19 Pandemic: From fiscal year 2019 to 2021, the national debt increased by about 50% due to the substantial government spending of $3.4 trillion related to COVID-19 relief. This spending included tax cuts, Joe Biden’s $1.9 trillion stimulus programs, and increased government expenditures, exacerbated by reduced tax revenue from widespread unemployment.9.
Bipartisan Congressional Support for Ukraine: From the onset of the US’ proxy war in Ukraine, the Biden administration and Congress have earmarked over $75 billion in aid for Ukraine, encompassing humanitarian, financial, and military backing, as corroborated by the Kiel Institute for the Global Economy, a German research center. However, the government often borrows money by issuing Treasury bonds and securities to cover deficits resulting from increased defense spending during conflicts. This borrowing adds to the national debt as the government accrues interest on the borrowed funds.Who is the US Indebted To?
Public debt finds its place within the hands of a wide spectrum of stakeholders, including individual investors, institutions, and foreign governments. After factoring in intragovernmental holdings, the subsequent most substantial segment pertains to the national debt held by foreign governments.
Among these foreign entities, notable ones include Japan ($1.1 trillion), China ($859.4 billion), the United Kingdom ($668.3 billion), Belgium ($331.1 billion), Luxembourg ($318.2 billion), Switzerland ($290.5 billion), the Cayman Islands ($254.1 billion), Canada ($254.1 billion), Ireland ($253.4 billion), and Taiwan ($234.6 billion), as per statistics from the US Treasury.
What Are the Implications of an Increasing US National Debt?
Elevated debt levels pose significant risks to the United States and its citizens. These include:
Imperil Economic Well-Being: The recent spike in deficit spending has added to swift short-term inflation and will eventually result in higher interest rates, a slowdown in economic and income expansion, and a minor, yet increased, susceptibility to fiscal crises. Moreover, it heightens anticipation of elevated inflation rates and undermines trust in the US currency.
Exert Pressure on the Budget: At present, the federal administration allocates an equivalent amount of funds to interest payments as it does to the amalgamation of most safety net programs. Projections indicate that interest will surpass all other government expenditures within the coming three decades. As interest and obligatory spending assume a more substantial portion of the budget, the government's capacity to allocate resources to fresh initiatives will be constrained.
Risk to Social Safety Net: The precarious fiscal trajectory poses a risk to both the safety programs and the most disadvantaged members of society. If the US government lacks the necessary resources, critical initiatives such as Medicaid and Social Security, and the individuals who rely on them the most, might face potential jeopardy.
Emerging Threats of a New Crisis: The mounting debt carries inherent risks for the stock market. The ongoing borrowing trend will eventually create a scenario where securing additional funds for the government becomes progressively challenging. As interest rates climb, the pace of federal growth accelerates. This sets an unsustainable course, necessitating a significant economic correction. Likely outcomes could be weakened stock market performance due to eroding confidence in federal fiscal policies, or even discontinuing the US debt ceiling.