The Global Debt Crisis: A Looming Threat to Economic Stability

The Growing Burden of Public Debt

The public debt exploded during the pandemic, and new borrowing this year is projected to reach record levels in several major economies. This surge in debt has rendered governments less capable of responding to financial meltdowns, pandemics, or wars. It has also raised concerns about their ability to fund public services and address the pressing issue of climate change.

FILE PHOTO: Fire damage is shown in the Wahikuli Terrace neighborhood in the fire ravaged town of Lahaina on the island of Maui in Hawaii, U.S., August 15, 2023. REUTERS/Mike Blake TPX IMAGES OF THE DAY/File Photo

Even in the absence of a new crisis, the soaring debt servicing costs are expected to constrain efforts to tackle climate change and care for aging populations. This has led to strains on public services in many countries after successive budget cuts. Moreover, as debt burdens grow, governments could find themselves unable to borrow more to service existing obligations and fund basic services adequately.

A worker receives Argentine peso banknotes in a shop in Buenos Aires, Argentina, on Tuesday, Sept. 26, 2023.

Testing the Limits of Government Debt

The United Kingdom, the world's sixth-largest economy, serves as a cautionary tale of the potential consequences when investors reject a government's plan to borrow. In 2022, the pound and UK government bonds sold off sharply in response to plans to issue more debt, leading to a surge in borrowing costs. This situation underscores the challenges governments face in managing debt and the potential risks of investor rejection.

Former South Carolina Gov. Nikki Haley and Florida Gov. Ron DeSantis participate in a CNN Republican Presidential Debate at Drake University in Des Moines, Iowa, on January 10, 2024. (Will Lanzoni/CNN)

While central banks can provide temporary emergency support, they cannot finance government deficits in lieu of bond investors. The example of crisis-stricken Argentina, where the central bank printed pesos to help the government continue paying interest on its debt, highlights the detrimental effects of such tactics, including currency devaluation and hyperinflation.

The US Treasury Department building is seen in Washington, DC, January 19, 2023, following an announcement by the US Treasury that it had begun taking measures Thursday to prevent a default on government debt, as Congress heads towards a high-stakes clash between Democrats and Republicans over raising the borrowing limit. - The world's biggest economy could face severe disruption with Republicans threatening to refuse the usual annual rubber stamping of a rise in the legal borrowing limit, and this could push the United States into default. (Photo by SAUL LOEB / AFP) (Photo by SAUL LOEB/AFP via Getty Images)

Implications for the Future of the World Economy

The surge in public debt and political brinksmanship have already taken a toll on the credit ratings of major economies. The United States, in particular, has faced credit rating downgrades due to mounting debt levels and political polarization. This has led to increased borrowing costs and raised concerns about the country's ability to repay its debt.

The increased cost of servicing debt, coupled with slowing economic growth, poses significant challenges to addressing the climate crisis and funding vital public services. As governments grapple with the burden of debt interest payments, questions arise about the potential impact on future economic stability and the need for innovative solutions, such as artificial intelligence, to mitigate the repercussions of the global debt crisis.