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The Global Risks of Debt Unsustainability – The Catalyst

October 26, 2023 | OPINION | By Zoraiz Zafar

Much to the chagrin of the plethora of economic “gloomers” who had been long predicting an impending financial crisis – as promised by Jerome Powell’s Federal Reserve – appears to be an increasingly probable eventuality. A recent Wall Street Journal article reported that confidence in the United States economy continues to see gradual improvement as inflation, though still higher than The Fed’s intended target range, works its way downward. The worst, it seems, is behind us.

But a $235 trillion question still hovers over the global economy. This figure represents the volume of global debt, including public debt, household debt and non-financial corporate debt, and has witnessed an increase of 32% in just the last 15 years. While it is true that, in that time, the world has had to contend with multiple global crises that required fiscal intervention, such as the 2008 financial crisis and the COVID-19 pandemic, the unsustainable nature of this debt bubble poses a significant threat to macroeconomic stability.

Unfortunately, this debt bubble is not just a national or even regional concern. Both the U.S. and China, considered to be the world’s two economic superpowers, have become increasingly vulnerable to the risks and downsides of a sovereign default, an outcome that has sent government bond yields spiraling upwards as of late. Meanwhile, less developed countries, such as Sri Lanka, Pakistan, Tunisia and Kenya, have followed suit and loaded up on unsustainable debt that they will have a hard time paying back not just in the long run, but in the short run too.

But how exactly did this happen? How was this even allowed to happen? The answer is the former era of easy money. You see, in the aftermath of the 2008- financial crisis, global markets saw a precipitous decline in interest rates, which only accelerated upon the onset of the COVID-19 pandemic. As a result, the cost of borrowing for economic agents across the world fell significantly, resulting in increasingly bloated balance sheets and eventually culminating in the formation of a global debt bubble.

Today, that bubble is as close to popping as it ever was. As interest rates rise to levels not seen since the 1980s and are expected to stay there for a while, the era of easy money is fundamentally over. Therefore, the spending sprees of yesterday are no longer financially sustainable. And those parties, be it national governments, corporations, or even individuals, who were late to recognize these evolving macroeconomic trends will now be left holding oversized bags of unsustainable debt.

In my opinion, this problem should be looked through the lens of not just theoretical economics, but also sustainability. Under the United Nations Sustainable Development Goals framework, there is a goal to enhance global macroeconomic stability through equitable and mutually beneficial partnerships: Goal 17. Specifically, this goal seeks to “strengthen the means of implementation and revitalize the Global Partnership for Sustainable Development,” and lists various targets and relevant indicators to monitor the progress of its subgoals.

I strongly advocate for the addition of global debt levels to this set of targets and indicators at the upcoming U.N. Conference On Parties 28 Conference. Addressing this issue from this angle will assist in enhancing awareness while also facilitating non-partisan and global discourse around the topic. For those of us who are considered as members of the youth, it is important to realize that this issue directly threatens our prosperity more than any other age group. After all, the spending-happy politicians of D.C. are unlikely to be around when the time comes to pay the piper, but you and I will.


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