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THE WEALTH OF NATIONS: The Global Debt Trap and the Role of Finance in Preserving Democracy By Evan Anderson Why Read: The world has a debt problem. With concurrent crises (climate costs, pandemics, and war) on the horizon, this week's issue covers why that matters and what governments are most likely to do about it. ______ "Debt is the slavery of the free." - Publilius Syrus (85-43 BC) Paradigm shifts can be hard to detect as we move through our day-to-day lives. These days, it may feel things are going along more or less "as usual," although groceries and restaurants are getting awfully expensive. But three new paradigms have emerged that differentiate our period from that which came before; in fact, the global economy today is radically different from that of just 20 years ago. What are these three paradigms? First, the era of the great financial crisis led us to the era of quantitative easing (QE). Described by SNS many times now, this "race to the bottom," low-interest currency competition has not just rewritten how financial markets work (and interact), but it has also helped to fundamentally rearrange where jobs exist and who makes the items we see on our shelves. While all that cheap (or cheaper-than-cheap) money helps prop up banks and keep inflation up, it increases bank exposure to governments (via increased holdings of their debt). It also keeps governments' borrowing costs down, leading to an interplay, in the eyes of a government, between elevating inflation rates (which eats away at the cost of servicing debt) and the low borrowing costs that also result. So far, the global outcome seems to have been that many governments wind up in a trap wherein raising rates will hurt too much: they are stuck in a cycle of low rates. Japan is a perfect example of this, with a massive and growing debt burden while the Bank of Japan struggles to find a balance in its rates, currency, and declining population. The United States provides a counterexample, in which heavy rate rises post-QE in a response to skyrocketing pandemic inflation have stabilized inflation numbers (mostly) while also leading to an incoming reckoning with national-debt payments. Second, costs are rising fast. The cost of the global pandemic is beginning to be joined by the steady grind of climate disruption. Meanwhile, multiple new pandemics (H5N1 and, as of last week, mpox again) that may actually have death rates far higher than the current one are brewing. The apt realization that the CRINK countries (China, Russia, Iran, and N. Korea), and the wars they start, are not, in fact, good-faith partners has led to more complicated trade relationships, which also drag on economic growth. We are now in an era of spiraling fiscal difficulty. Third, many governments around the world decided, at some point, that national debt didn't really matter. This is not necessarily a new error, but it has taken a new and more universal form. The thinking appears to be twofold. In democracies, the game after the year 2000 increasingly became this: while your party is in office, win favor with voters and corporations by pushing through as much of your brand of spending as you can. Then spend the next cycle trying to stop the opposing party from doing the same. In fact, in the United States, the last time the budget was balanced was under Bill Clinton in the 1990s. George W. Bush's forever wars amid tax cuts for the wealthy (a novel dual approach to national finances, as we will see below) gave way to the massive 2008 Financial Collapse bailouts, which gave way to the pandemic and its bailouts in a spin cycle of trillion-dollar spending. A quick look at the above chart of US debt accumulation reveals that most of the debt held by the US government - about 84% - has been added since the year 2010. In 15 short, hard years, the United States has ballooned its debt to previously unimaginable levels.
But the US is far from alone. Let's take a look at debt around the world. |
