Transcription
That's an important question. Are global finances in peril? The IMF and OECD warn public debt is hitting levels not seen since the hard years of recovery and repayment that followed the end of World War II.
Yeah, but how much debt is too much? Or is it less about the amount, but actually how we think about debt? CNU joins us with this report.
Anytime anyone said there's a tradeoff, you want to use your credit card to buy more stuff, but remember you're going to owe more money. They didn't want to hear it.
Or you can choose not to hear arguments for fiscal austerity. But you cannot not see what any online search will show on how much countries have borrowed at one moment on one day in the month of December 2025. This one supplying every conceivable metric on the world's largest economy. Figures vary depending on which country or countries is or are included, but equally prominent on at least one site is this figure.
Our interest puts a value on the contract between lenders offering credit and borrowers holding debt, allowing spending today on the promise of payment from what might only be earned tomorrow. We are able to spend today what we do not in fact have today because of this arrangement which is credit.
The way to think about this is money is not just created out of thin air. Instead deposits in the bank can then be lent out as credit. So the credit allows money to be multiplied fivefold, 10fold, 20fold. And this credit the other side of which is debt is extended to corporations, households and that's what circulates and leads to economic growth.
All right. But that's assuming that the money you borrow goes into what you suggested very productive segments of the economy.
For sure. And and this is where debt and debt sustainability come in.
One needs to look at the efficiency of spending and then yeah some debt is better than others. Some spending is better than others. If you only incur debt for consumption expenditures, you will not have that productivity effect that would pay back for for the debt.
Debt is great. It's great to be able to borrow to buy your house or to buy stuff and to pay it back over time. It's great for the government to be able to borrow in a financial crisis, a pandemic, to deal with a recession, to pay for infra infrastructure. It's often much more efficient to allow debt to go up than to raise taxes. The thing is how much do you let it go up?
So there is no magic overall number, but it depends upon the growth prospects of a country. It depends upon the revenue capacity, the capacity to repay uh that debt out of existing resources. It depends upon the composition of debt. Who is it owed to? Is it domestic versus external investors? It depends upon the country's own vulnerability uh to shock.
We're confronted with a trinity of risks. One is a geoeconomic risk. We don't know whether we'll earn enough. Global trade is being threatened. So on and so forth. We've accumulated a huge amount of debt and so we don't know whether that income can pay it off. That's one.
The other is a lot of this debt was accumulated during a period of really low interest rates whereas interest rates have risen and risen significantly so which means the burden of servicing this debt has increased disproportionately.
At some point markets say well this is uh this is not acceptable to us. We demand higher interest rates because of the risk that we see in the future path of debt and that would then squeeze spending in the budget even more because you'd have to pay more for servicing your debt than in the past and that would then mean that uh politicians would have to get their act together to find those solutions.
Interest costs for the United States have more than doubled. they'll soon have tripled over a very short period thanks to the fact that these interest rates have gone up. So that's number one. Number two is our debt uh relative to income is very high. So any measure of our debt picture doesn't look very good. It's really uh approaching or well past historic highs. And then maybe most importantly, because let's remember at the end of the day, it's political. Neither party is prepared to think about anything that would bring budget deficits. That's how much you're adding to the debt each year into line.
Global debt is now on a steeper path than prepandemic projections. For about onethird of countries, they will see debt higher than prepandemic levels and rising faster. And these economies account for about 80% of global GDP including the US, China, France, the UK, Brazil, and South Africa.
Countries are currently facing a trlemma. So it's not just that they need to bring debt down. They're facing these massive spending pressures for economic security to address population aging among other uh uh factors. So these spending needs need to be accounted for even as political red lines on on taxation are becoming more entrenched.
I don't think we are in a crisis at this particular point. But we may drift towards one without the political control that it takes to adjust spending to increase revenues in some countries particularly the United States. the tax levels have been cut so far especially on the rich that there is now a real tax deficit for the United States and other countries should probably uh spend a bit less and become more efficient. So so but whether it is a crisis not yet.
it is not accurate is in fact not useful to call this a debt crisis.
I would tend to agree. Um the fact is usually we would we would be able to identify periods of stress and crisis much better when we look back rather than at the point we're in it. Uh but by and large yes I think at this point debt uh servicing is is not a huge risk uh in in aggregate but it is a growing risk.
There's a big question mark as to where uh growth a long-term growth prospects are headed. A second unknown is whether interest rates are going to remain higher for longer or financial conditions are going to remain much much more volatile. This also depends upon the geo politics of it. Uh this could have a huge bearing on count's debt carrying capacity.
If you cut interest rates now, it's not going to drive inflation up right away. These things take a long time. They're slow. They're insidious. Frankly, much like tariffs, tariffs don't necessarily cause huge growth damage right away, but over the long run, believe me, they do.
We don't know how much debt is too much. We It's just not known. We don't know what the limit is, but we do have historical experience and certain guideposts. And I think people who just say those are irrelevant, this time is different are fools.
There's a lot we cannot know, but there's one thing we do know. On the last check on this figure around 7 minutes ago, it's gone from this to this. It's a relative jump, but with very real cost. When the world has more debt than it has value, as the IMF warns will happen by 2029, that is tempting the fiscal gods. That can be too much of a good thing.
I think it's always fascinating that you know debt levels you know despite their importance are quite overlooked. I mean even business news when we talk about you know the country's uh economic situation we always look at stock markets jobs GDP but we rarely really talk about that. Yeah, you're right. And I I I suspect the reason is because they're kind of they're not so sexy. You know, they're very slow. They're very abstract. You know, you talk about like debt to GDP ratios, huh? You know, whereas for stocks, you're like, whoa, record high, record low, you get absolutely, we get excited, you know, about that kind of movement as opposed to something that's kind of creeping along a little bit like climate change. You know, why people don't get excited about climate change? But I have to say, I've had a change of heart recently when I found out that the United States is going to pay this year interest payments of a trillion dollars. Just interest payments totally nonproductive. So I'm very glad that you're here way because you've been looking at this, you know, in depth. I I'm wondering, you know, how is it that when you make payments which are almost twice Singapore's GDP, payments which are bigger than America's defense budget, no one seems to be overly concerned. The bond markets, you know, they're reacting a bit, but they don't seem to be overly, you know, concerned about the situation. How is what is the US doing right, I suppose, to keep, you know, panic at bay?
I think if you spoke uh as I had to do with the various experts and they have been experts in various fields and serving different offices they'd say and I'd get to your point actually Elizabeth it's political the mindset now is that we're fine with levels of debt like this or at least uh the action suggests they're relatively although in Europe you've seen recently Italy and Spain doing something to in terms of fiscal consolidation in the UK as well. We've seen uh moves that way. But the mood is there will be growth and then this is wild and I'm sure you do this every day. Wild grasping at artificial intelligence as that magic super driver of growth. We will get that growth in the future.
So everyone's basically convinced themselves that as long as we have growth, we have AI driving this current boom, it's okay to have high levels of debt. That kind of does that kind of sum it up in a way.
Or not these people we spoke to they're saying well the risk is depending different degrees the risk is not immediately there but I think IMF uh the deputy director of the fiscal affairs department she was warning she calls it the IMF's debt trillma so right now the mood is not there to cut to increase taxes cut spending and certainly not increase spending in the right areas uh the debt dynamics are no good. So interest rates uh going up which means the servicing of debt will go up. There's always adverse spiral there. So the harder it gets the harder it will get in the future and the harder it is right now and there are uh structural spending uh necessities. So aging populations most of us are facing that aging populations healthcare childare education I think the US figures you quote more spent on that than on defense and therefore more spent on that then on education childare investing in the future generation.
At the same time they have tax cuts as well right. Yeah with the big beautiful bill right. Yeah.
Well one interesting thing um one of your interviewees had actually said was uh that actually a lot of debt was accumulated when interest rates were low so I I'm interested to know what happens when there is a need to raise interest rates although you know in the US we're seeing the president put pressure on the Fed day to keep interest rates low but when interest rates have to go up what will happen then.
Oh uh several things happen as you well know uh but primarily here the servicing of debt just becomes that much more ownorous and the riskier it seems to lend to someone the more you are going to demanding in terms of cost not just now but also in the future. That's why we are seeing uh last year for a while shortterm short maturity bond yields diverging from long yeah two year and 30 year. Yeah. suggesting that looking into the future they see greater risk in terms of whether or not people can service climbing levels of debt.
And just to go back to the basics a little uh why is debt such a significant part of economic growth these days?
Actually I didn't know I thought we I was just asking in the newsroom. So Sharon who is really good on she said but you need it. I said but why? He says you need it. You pay it off so that the next time you borrow you'll get on good you get good credit rating so you can borrow on easier terms. So I said but why not just pay off and don't borrow. He said no you need to borrow but you need to borrow on good terms.
So you you borrow you pay and then you borrow again but you pay it well so the next time you borrow you get on good terms. I think that basically is the crux of it, right? You have you have to borrow to get the growth that you want, you desire to spend on infrastructure and so forth. But it's how you spend. It has to be spent wisely. Uh it has to be productive. I mean, I think one of your guests talked about how it cannot just be on consumption. It has to be far wider. It has to be certainly not borrowing so that you can pay off service your debt. So down the road as you were saying that you can borrow again on favorable terms and continue to pump the money into the into the protective productive sectors of the economy and keep growing.
Basically. I didn't realize is that guess you mentioned he said well is there's a multiplying effect. So it's not just $1 becomes 50 becomes if it is lent out which I didn't think of.
And to take this in a slightly more nuance way, there is also the difference between absolute debt which which is the highest in the United States uh but it's not the highest when it comes to debt to GDP ratio. So so can you sort of take us through the difference between the two and why that nuance is important?
So debt to GDP so it's the amount of money a country owes in its an entirety as opposed to deficit which is just what happens every year to the value of a country that's a GDP so the US as as you mentioned the last time that the record well the last time we saw above 100% so was after World War II and that happens because of war and and this is another concern now which we didn't raise which is there are times in which you should have debt and you will have debt during war and then after that you need to pay it off. So, they're good years and they're lean years. In good years, you need to be saving money in building your buffers. That's the IMF's point because there will be bad years.
Uh so 106% for the US debt to GDP after World War II. It fell to about 21.6% in the 1990s. Now it's back to almost 100%. The projections are beyond 100% in a few years.
Uh but uh President Trump says we'll grow. The economy will get big beautiful growth. The best economy in the world ever.
Thank you so much for that. We're talking with Wayu about, you know, really the question of how much debt is too.