Global debt catastrophe fears are overblown, new analysis shows

Fears that soaring government debt will trigger a global financial catastrophe are misplaced, according to a new analysis that urges investors to look beyond alarming headlines. While US federal debt has passed the $40 trillion mark, the bigger picture shows total global debt has fallen relative to economic output over the past decade.

The analysis, published in The National, argues that focusing on round numbers without context creates a misleading sense of doom. Measured against global gross domestic product, total debt of all types — government, corporate and household — now stands at 246 per cent, down from a peak of 285 per cent during the Covid-19 pandemic in 2020. That brings the ratio back to levels last seen around 2016.

Part of the improvement came from inflation, which reduced the real value of existing debt and expanded the tax base. Since 2020, global public debt has fallen from 111.5 per cent of GDP to 95.6 per cent. Corporate debt slid from 106.6 per cent to 93.3 per cent, while household debt dropped from 69.8 per cent to 59.8 per cent. The world could add another $42 trillion in debt before returning to the 2020 peak, the analysis notes.

In the United States, corporate debt has barely changed relative to GDP, but household debt has plunged from nearly 100 per cent of GDP in 2010 to around 67 per cent now. That shift matters because household and corporate debt are riskier than government debt: governments can tax or inflate away liabilities, while households and businesses simply default.

Even within government debt, risk has declined. US state and municipal debt, which cannot be inflated away, has fallen from 21 per cent of GDP in 2010 to just 11 per cent today. Meanwhile, federal interest payments are still covered five times over by tax receipts — a ratio similar to the late 1980s and early 1990s, when the economy boomed.

The analysis also points out that today’s bond yields, while higher than recent years, are close to their long-term historical average. The 10-year US Treasury yield of around 5 per cent almost matches the average of 4.7 per cent since 1926. Yields were far higher in the 1980s without preventing economic growth or stock market gains.

For readers in the Gulf, the message is clear: the global debt situation is not a reason to panic. While government spending remains wasteful in many countries, the overall debt burden has improved in recent years, and the riskiest forms of debt have shrunk as a share of the economy.