Start Preparing for the Coming Debt Crisis

The next U.S. administration will likely face a global debt crisis that could dwarf what the world experienced in 2008-2009. To prevent the worst, it will need to address the burdensome debt plaguing both the United States and the global economy.

Even before the COVID-19 pandemic paralyzed economies around the world, economists were warning about unsustainable debt in many countries. Take the United States: A surge in spending to mitigate the health and economic impacts of the pandemic has brought the total public debt in the United States to over 100 percent of GDP—its highest level since 1946 and a hurdle that will create a considerable drag on future economic growth. Other types of debt—household, auto, and student loans, as well as credit card debt—have seen similar surges. Almost 20 percent of U.S. corporations have become zombie companies that are unable to generate enough cash flow to service even the interest on their debt, and only survive thanks to continued loans and bailouts.
A new administration will need to act quickly and deftly to avoid outright default scenarios at home and abroad.

Multiply that across the globe. Total global debt stands at an unsustainable 320 percent of GDP. Perhaps more worrisome, China is now an important creditor, which adds a geopolitical dimension to the concerns over debt. China is the largest foreign lender not only to the United States, but to many emerging economies. This gives the Chinese political class enormous leverage. Naturally, the combination of strained U.S.-Chinese relations and the dependence of many advanced and developing countries on continued Chinese credit and investment limits the scope for negotiations on debt restructuring or moratoriums.

The global picture has become even more complicated because many of the conventional ways to manage excess debt no longer look like credible options. For instance, with the IMF projecting the global economy to contract by 4.4 percent in 2020, it looks unlikely that countries can simply grow their way out of debt. Conventional or even unconventional monetary policies are also unlikely to provide any relief—interest rates in most developed economies are already historically low and even negative, and central banks’ balance sheets are stretched from the policies they have followed since the 2008 financial crisis and expanded in the course of the pandemic. Piling debt on top of debt seems to have reached a dead end.

A growing number of economists and policymakers are beginning to talk about the need to shift to a new, possibly digital monetary regime whose contours remain unclear. With the pandemic and its economic fallout showing little sign of abating, it could be the next administration that will have to manage this complicated domestic and international transition with all its potential for financial, social, and political instability.

Even short of such a challenging transition, policymakers in a new administration will need to act quickly and deftly to avoid outright default scenarios at home and abroad. Default would severely limit the ability of governments to address urgent concerns such as public health, economic recovery, and climate change. A full-fledged debt crisis would be devastating to the whole global economy—and to the prospects for human progress.