For every second in the world that ticks away, someone somewhere is taking on more debt. The Times Square clock of New York is a constant reminder of this, with last week displaying a count of 305 trillion in global debt. Until last year, we’d seen an impressive ten percentage points decline in both public and private debt; however, as the economy rebounds we seem to be sinking further into debt. How did we get here?
3 Core Factors Behind The Global Debt Wave
From the outrageous 1960s debt surge to the 2008/2009 global financial crisis and 2019’s pandemic-induced recession, the global economy has been oscillating in and out of volatile debt rates for a minute, which is no coincidence. Financial analysts argue that there is a reason behind each global debt swing, and while most of these factors are dynamic, some are re-emergent. Ahead we delve into five contributing factors behind the worldwide debt wave.
1. Economic Growth And Fluctuations
The pandemic-induced recession has significantly influenced a sharp rise in global debt. At the onset of Covid, most countries witnessed a pronounced GDP drop, translating into a steepened debt-to-GDP ratio. By 2020, things loosened up, and economies moved from worse to better following a strong rebound which significantly helped inch down the global debt ratios. With the economy bouncing back, more people were inclined to invest, and lenders facilitated the move with lower interest. While this was good for economic growth, it added to the global debt ratio.
2. High Inflation Rates
On that same note, inflation rates fell at the onset of the pandemic as most countries struggled to strike a feasible balance between their economic output, unemployment patterns, medical and financial constraints. However, this trend was only temporary, as the end of 2020 saw agile economic rebounds ushering in increased inflation rates in 2021. Without any output tied to this rise, most debtors were overwhelmed with their credit repayments, changing the nominal GDP and debt ratios.
3. Economic Shock And Aftermath
Volatile economic situations are also known to impact global debt dynamics considerably. When a country goes through a crisis, it will slow economically, discouraging investment over the fear of risks and losses. To curb such anticipation, governments and policymakers offer significant support to individuals and businesses to rebound the economy. Ultimately, this builds on the global debt and deficits count, piling on to the already heaped global credit.
Final Takeaway
The global debt count has been a never-ending due for humanity; with each waking day, the numbers go up a notch despite the economic strides made by society. But here’s the thing, for us to ever stand a chance at eliminating global debt, we must understand what sets it off. When we better understand what causes and possibly accelerates the accumulation of debt, we can strategize and develop actionable tips to tackle the problem. With this article covering three of the most common causes of global debt, we’re off to a good start.