The beginning of the week saw three warnings about rising debt levels, causing alarm in financial markets. The French government deficit was found to be higher than expected, adding to the burden of debt in the country. Larry Fink, head of a major financial institution, warned of increasing levels of debt accumulation globally. The Congressional Budget Office in the US also highlighted rising debt levels, projecting a rise in debt to GDP ratio in the country.
The issue of rising debt levels has been a preoccupation for many, as it is seen as a barrier to sustainable economic growth. High debt levels have the potential to impact politics and great power rivalries. Lessons from the global financial crisis seem to have been forgotten by the policy community, with recommendations from key books on the topic remaining unheeded. Debt has become a pervasive aspect of the economy, with UK public debt increasing significantly since the financial crisis.
Indebtedness is correlated with other crises, such as climate change, with both growing in tandem. The economic system has adapted to accommodate both climate change and rising debt levels, with policymakers assuming that central banks can control bond market volatility and catastrophic climate events only happen in emerging countries. Despite historical trends suggesting a looming debt crisis, the economic system has adapted to operate in a climate of high debt levels, leading to what could be termed an ‘Age of Debt’.
The rise of the ‘debt industry’ is a potentially concerning trend, with private credit firms and fintech companies providing lending services beyond regulated banks. The use of AI and scraped data to assess creditworthiness has led to the proliferation of high personal debts through digital lending platforms. This trend is adding more risk to the financial system and could potentially lead to the concentration of debt risks within individual countries, making national financial systems riskier.
The global financial system had become interconnected prior to the 2007 financial crisis, leading to contagion spreading across international markets. However, the growth of the ‘debt industry’ and the focus on national lending markets are shifting the risks associated with rising debt towards individual countries. The ability of national financial systems to manage debt will likely become a key factor in the rise and fall of nations in the 21st century. The concept of the ‘Age of Debt’ suggests that debt levels have become so ingrained in the economic system that they are now a defining feature of the global economy.
