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The world is in debt. Record amount of debt. Three hundred trillion dollars, to be exact.
That’s the total amount owed by governments, households and corporations worldwide in June 2022, as estimated by the Institute of International Finance.
That figure is about 349% of global gross domestic product and the equivalent of $37,500 worth of debt for every person in the world.
The world’s leverage is much higher than before the global financial crisis; the public debt-to-GDP ratio reached 102% in 2022.
Why is it important? Demand for debt to help consumers fight inflation, rebuilding infrastructure and combating climate change continues to grow, Terry Chan and Aleksandra Dimitrijevic wrote in a report from S&P Global Ratings on Friday.
“Rising interest rates and slowing economies are adding to the debt burden,” they write. Fed funds and European Central Bank interest rates have risen by an average of 3 percentage points in 2022. That could mean $3 trillion more in interest costs.
At the same time, Chan and Dimitrijevic note, debt has become less efficient since 2007. That means the value that each borrowed dollar adds to the economy has declined.
What does it mean: High interest rates are already hurting governments and corporations with poor credit ratings. Low-income households also struggle with rising credit card, mortgage and auto loan costs. If the debt pile continues and central banks continue to raise interest rates, that burden and the fear of recession will grow as well.
When the yield on government debt increases, so does the cost of borrowing for corporations. Companies in the US are feeling the trickle-down effect of higher interest rates and may have to raise prices or cut their spending on growth and expansion to keep up. Rising interest rates also affect stock prices. In 2022, Federal Reserve hikes contributed to a nearly 20% decline in the S&P 500.
What’s next? There is no easy way out of the global debt crisis, write Chan and Dimitrievich. Avoiding a crisis will require unpopular actions and a “major reset” of policymakers’ mindsets. That could mean more cautious lending, limiting overspending and restructuring projects or organizations that aren’t making a profit.
About that debt limit. Reaching the debt ceiling is a big concern in Washington.
Currently, there is a high probability of reaching the limit set by the US government on how much money it can borrow. Treasury Secretary Janet Yellen warned that the US could strike as early as Thursday.
Congress can avoid partial government shutdowns, potential cash flow shortfalls, and even the possibility of default by simply raising the ceiling, as it has done in the past. But House Republicans have said they won’t support raising the borrowing limit this time unless Democrats agree to spending cuts and other concessions.
In a letter to Congress this weekend, Yellen warned that without action the US could default on its debt by June. “The government’s failure to meet its obligations will cause irreparable harm to the US economy, the livelihoods of all Americans, and global financial stability,” he wrote. “Indeed, in the past, even threats that the US government might default have caused real damage, including the only downgrade in our nation’s history in 2011.”
Moody’s Analytics calls the repeal of the debt limit “cataclysmic.” The researchers estimate that the consequences would be a drop in GDP of almost four percentage points, the loss of six million jobs and a drop in stock prices by a third.
It’s been a long, cold winter for Bitcoin, but a thaw may be coming.
After being beaten for most of 2022, Bitcoin and other cryptocurrencies are on the rise in 2023, reports my colleague Alison Morrow.
Bitcoin, the world’s most popular crypto, is up more than 26% in the past month, topping $20,000 for the first time since November, when the implosion of Sam Bankman-Fried’s FTX trading platform sent shockwaves through the industry. Ethereum, the No. 2 crypto, is up more than 30% in the past month, trading above $1,500 on Monday.
“Wall Street is very confident that the end of the Fed’s tightening cycle is upon us, and that’s providing some support for crypto,” Ed Moya, senior market analyst at Oanda, wrote on Friday. “Unless we hear some strong hawkish response from the Fed or if commodity prices rise, crypto traders shouldn’t be surprised if Bitcoin can extend its recent gains.”
Bitcoin peaked over a year ago in November 2021 from just $69,000. Two months ago, when the FTX contagion gripped the digital asset market, bitcoin fell to a two-year low of $15,480.
China’s economy expanded by just 3% in 2022, well below the government’s target, marking one of the worst performances in nearly half a century, my colleague Laura He reports.
The country’s growth has been heavily impacted by months of Covid lockdowns and a historic slump in the property market.
“China’s domestic economy has experienced unexpected shocks in 2022, including frequent Covid outbreaks and extreme heat,” NBS Director Kang Yi said at a news conference in Beijing.
“The triple pressures of reduced demand, shocks to supply and weakening expectations continue to develop, and the complexity, severity and uncertainty of the environment are increasing.”
China has taken a zero-tolerance approach to the coronavirus since the outbreak began. But the three-year restrictions have wreaked havoc on the economy, fueled public anger and put extraordinary pressure on local government finances. Under mounting pressure, the government reversed course in early December, effectively ending its controversial zero-Covid policy.
However, while the easing of restrictions came as a relief to many, the abruptness of it caught society off guard, leaving people mostly to fend for themselves.
The rapid spread of the infection has driven many people indoors and emptied shops and restaurants. Factories and companies were also forced to close or reduce production as more workers fell ill.