World debt has reached an all-time high of over 300,000 billion dollars. If this amount explains so many things, it is above all the driving force behind a boundless ideology in a world of risks and stakes of all kinds. At a time of revolutionary interest rates, economic agents are seeking to reduce their debt in order to remain solvent. The financial system not only needs growth to be sustainable, but also scarcity…. However, a major reduction in global debt is unrealistic.
On a national scale, debt can be reduced by three different means: growth, inflation or a slowdown in the cost of government living. Let’s take these elements one by one. In recent years, despite a sharp rise, inflation has failed to reduce the overall level of debt. From the health crisis to the war in Ukraine and the many economic and social issues at stake, global debt has continued to rise all over the world.
Global growth has remained very weak, despite catching up in 2021, and is gradually slowing as global balances are reconfigured. De-globalisation and geopolitical conflicts are further impediments, with the exception of certain specific regions such as Africa and East Asia, where demographic power is a growth driver. Finally, at a time when inequalities are reaching record levels, governments are maintaining very high levels of spending, preventing them from returning to a budget surplus. On the other hand, they could resort to taxation to raise new revenue, but the effects would be counterproductive and, above all, would have no influence on the very nature of the increase in their debt. Not to mention the fact that, in many countries, tax revenues are now at record levels as a proportion of wealth produced … just as they were in 1939.
In the private sphere, the indebtedness of companies, both financial and non-financial, and households, depends essentially on the international context and the programmes put in place by countries and their institutions. The extremely favourable borrowing conditions of recent years and the resulting fall in the cost of money have naturally encouraged people to take on debt. This trend has been exacerbated by the innovation of financial institutions and accelerated technological development. While government debt represents 97% of global GDP, household debt accounts for almost 70%, non-financial companies for around 100%, and banking and financial institutions for 80%. This situation is untenable for households and businesses, the overwhelming majority of which cannot roll over their debt like a government can, nor operate with negative equity like a central bank. The increase in business bankruptcies bears witness to these challenges.
The question then arises: is it possible, today, to carry out a major debt reduction? Looking at recent history, the years following the 2008 financial crisis have shown that it is not. In Europe, for example, despite budgetary rules imposing a maximum debt/GDP ratio of 60%, European countries have taken on even more debt. Given the growing influence of the financialisation of the economy and the inability of central banks to finance the real economy, the debt dynamic has continued without any corresponding production of real wealth. Whereas in 2008, public debt in the eurozone stood at 65%, it is now close to 110%. This trend has been mirrored by most countries, particularly developing countries, which have limited access to capital markets and borrow at much higher rates.
Their dependence on private creditors also imposes very complicated repayment conditions, particularly in the event of restructuring, making them all the more vulnerable. The total public debt of developing countries has risen from 35% of GDP in 2010 to 60% in 2021. While the health crisis has played an important role, it is more generally the successive crises, wars and challenges of all kinds that have led to both a fall in growth and a rise in debt. Only a few countries have escaped this trend, including Jamaica, which has had a permanent budget surplus since 2012.
Today, the stakes are so high that the historic rise in interest rates is forcing governments to achieve a sufficiently high rate of growth to avoid a spiral of debt, which almost no country is managing to do because of the international context. The recommended solution is therefore to cut spending, as shown by the reform of unemployment insurance in France, to reduce the deficit and limit this spiral. At the same time, such a measure makes it possible to retain the confidence of economic agents and maintain a credit rating that is as good as possible. Debt is first and foremost a social and ideological construct, not a simple economic fact. Finally, other liberticidal solutions have been proposed, such as diverting private savings into public debt, to name but one, which would obviously do nothing to change the global situation.
As the exponential trajectory of debt means that for many countries, interest is one of the main items of expenditure in their budgets, the main solution is for central banks to lower interest rates. This would stimulate the economy and hence growth, while reducing debt servicing costs in the medium term. The most heavily indebted countries, such as Italy, France and the United Kingdom, would still have room to manoeuvre for some time before being truly strangled by the repayment of their debt. But the risk of such a measure, in a period of rising prices, is that it could trigger an inflationary spiral, accentuated by ongoing geopolitical tensions and one energy crisis after another. This situation, which is inconceivable for central bankers, means that they will have to keep interest rates sufficiently high until inflation is definitively curbed, at the cost of a major social, economic and financial crisis. A scenario explained in previous articles.
Faced with this impossible equation, the world is taking the tragic path represented by the global increase in the military budget. As the economist Margrit Kennedy rightly explained: ‘Armaments production is the only sector in which the saturation point can be pushed back indefinitely’. Put another way, war makes it possible to destroy and rebuild, thus creating growth at a time when growth is scarce, which reduces the level of debt. In 2024, military spending on all continents will reach a peak of over 2,700 billion dollars, fuelled by the wars in Ukraine and the Middle East, as well as other ‘cold’ conflicts in Taiwan, North Korea, Syria, Kashmir and the Balkans.
To halt this trend, a radical reform of the financial and monetary system is urgently needed. Moreover, the particular appeal of gold at this time, and its historic role as a currency, also testifies to the more or less conscious understanding that the contemporary financial model is reaching its limits. And that tomorrow’s model will have to be based on real wealth.
Such a change is possible. But voters must be informed of the urgency of the situation, and they must genuinely want it. This is a task for everyone.