Global government debt is almost at 100% of global GDP. This is historically high.
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| Note: chart does not go to zero |
This is bad, for reasons that are less clear than simply "debt is bad." (it is bad to have a ton of debt, I guess, but also that is not the whole reason that high levels of government debt are bad)
The FT also interviewed the debt issuance chief for the UK, who said that debt is becoming harder to sell, which means that one of the checks on fiscal policy will ultimately be the bond-buying market.
“Don’t kid yourself in thinking that you can develop policy in a vacuum without taking the market into account,” Stheeman told the Financial Times, reflecting on ex-prime minister Liz Truss’s ill-fated “mini” Budget of September 2022 which sent the gilt market into meltdown. “In a world where we have debt to sell, policymaking cannot be divorced from the reality of the market.”
Stheeman tempers this warning by explaining that he has faith in the gilt market. However, he says that government policy needs to understand that the market can act as a stopper on government policy.
The FT article points out that a lot of the borrowing is pre-election borrowing to prop up spending for votes. However, in places like the US, there is no signal that higher borrowing will stop.
Usually, bond prices are based on future interest rates. Now, they might be based on the trustworthiness of the issuer to pay the holder. In a fiat system, bonds can always be paid back, because the country that issues the bond also prints the money. This only works when you have a strong economy though. If your country has insufficient production to prop up the value of the currency, then you end up having to issue more debt at a higher price to the issuer. In the case that your country does not have the economic activity to pay bond debt, you have to pay insanely high interest rates on your bonds. For example, Egypt issued certificates of deposit at 18%. That does not make them better than lower rate Western bonds, that just means that Egypt's economy is so much worse. Also, high issuance of new money causes more inflation, and the cycle continues.
