The number is so incredibly large that for most of $247 trillion in debt is nothing more than a punch line. An amount so fuzzy it’s inconceivable for 99% of Americans.
Trump’s escalating trade war is directly tied to this enormous debt. Governments, businesses, and individuals across the globe take on debt with the understanding that they will the principal and interest or by rolling over the debts into new loans. This system works as long as incomes grow fast enough to allow borrows to make their, obligations. For that to happen, we all have to hope that with $247 trillion in debt, nothing happens to the world economy to trigger tens of millions delinquencies, defaults and a worldwide debt and financial panic like we saw take place in 2008/2009.
The trade war we see unfolding comes at a time when debt underpinning the world economy (GDP), has an obscene level – a whopping 318% of the world’s GDP. In just the first quarter of 2018, global debt rose by an $8 trillion. That includes the consumer, business and government debt of the world’s nations.
Servicing this debt when interest rates are low is a hell-of-a-lot easier when interest rates are low, and the world economy is healthy. President Trump’s trade war threatens to cut economic growth, shrinking incomes and slow down economic growth. Tariffs and trade restrictions, as a rule, will always make it a lot harder for borrowers to pay their debts. This makes Trump’s take no prisoner – never back down - approach to his trade war so incredibly dangerous.
A trade war could send interest rates much higher just as a new report by the Institute of International Finance (IIF), an industry research and advocacy group, says the debts of some “emerging market” countries (Turkey, South Africa, Brazil, Argentina) appear incredibly vulnerable to rollover risk: the inability to replace expiring loans. The IIF says that in 2018 and 2019 the total amount emerging-market debt of $1 trillion in dollar-denominated debt will mature.
Hung Tran, the IIF’s executive managing director says we’re approaching a turning point, he believes, new lending will slow or stop and borrowers will have to devote more of their cash flow to servicing existing debts even before the effects of Trump’s trade war start to retard economic growth…
“[We had] a Goldilocks economy, with decent economic growth. Inflation was nowhere to be seen, allowing central banks [the Federal Reserve, the European Central Bank] to be more accommodative [i.e., keeping interest rates low]. You could always roll over your debt. However, the probability of this continuing is much less now. . . . Trade tensions are on the rise, and this has already impacted [business confidence] and the willingness to invest.”
Tran isn’t predicting a full-scale debt/financial panic as we lived through in 2008-2009. Banks, for example, are far better capitalized now than before that last crisis. However, Tran is not factoring in Trump’s trade war. A trade war is highly inflationary and to nip it in the butt the Federal Reserve is already raising interest rates – trade protectionism will only compound the inflation risk.
What the IIF’s executive managing director is suggesting is a global shift away from debt-financed economic growth. The meaning of the $247 trillion debt overhang is that many countries (including China, India and other emerging-market countries) will be dealing with the consequences of high or unsustainable debts — whether borne by consumers, businesses or governments if debt-financed economic growth continues. Servicing the $247 trillion debt in a rising interest rate environment that could escalate rapidly by Trump’s trade war is economic suicide.
The low-interest rates adopted by central banks were justified as necessary to avoid a worldwide depression. Tran is quoted as saying at his recent IIF briefing…
“If you are in a high-debt situation, you need to bring the debt down, either absolutely or as a share of GDP… “[Either] will result in slower economic growth. You don’t have the borrowing needed to maintain strong investment and consumption spending.”
This may represent a final chapter both the U.S. 2008/2009 and the European Banking financial crises of the last decade. Back then critics of the dramatic lowing of interest rates worried that cheap credit would lead to risky lending and if there were another crisis the risk of even a bigger economic meltdown than we saw in the last decade would become a devastating reality.