The world is in debt. A record amount of debt. Three hundred trillion dollars, to be exact.
That's the total amount that governments, households and corporations around the world owed in June 2022, as estimated by the Institute of International Finance.
That number is about 349% of global gross domestic product, and the equivalent of $37,500 of debt for every single person in the world.
The world's leverage is much higher than it was before the global financial crisis; the government debt-to-GDP ratio shot up to reach 102% by 2022.
Why it matters: The demand for debt – to help consumers with inflation, rebuild infrastructure and address climate change – keeps on increasing, wrote Terry Chan and Alexandra Dimitrijevic with S&P Global Ratings in a report on Friday.
"Rising interest rates and slowing economies are making the debt burden heavier," they write. Fed funds and European Central Bank rates were up an average of 3 percentage points in 2022. That could mean $3 trillion more in interest expenses.
At the same time, note Chan and Dimitrijevic, debt has become less the productive since 2007. That means the value that each additional dollar borrowed adds to the economy has decreased.
What it means: Higher interest rates are already hurting governments and corporations with low-credit ratings. Low-income households are also struggling with the rising cost of credit card, mortgage and auto debt. If debt accumulation continues and central banks continue their rate hikes, that burden, and fears of a recession, will also grow.
When the yield on government debt increases, borrowing also becomes more expensive for corporations. Companies in the US feel the trickle-down effect of increased interest rates and may have to raise prices or reduce their spending on growth and expansion to keep up. Rising interest rates also impact stock prices – the Federal Reserve's hikes in 2022 contributed to a nearly 20% decline in the S&P 500.
What comes next: There is no easy way out of a global debt crisis, write Chan and Dimitrijevic. Avoiding a crisis will require unpopular actions and a "great reset" of policymaker mindset. That may mean more cautious lending, curbing overconsumption and restructuring projects or entities that don't make a profit.
About that debt limit: Hitting the debt ceiling is a big worry in Washington.
The possibility of reaching the self-imposed cap on how much money the US government can borrow currently looms large. Treasury Secretary Janet Yellen warned that the US could hit it as early as Thursday.
Congress can avoid the partial government shutdowns, potential cash flow shortfalls and even the possibility of default by simply raising the ceiling as it has in the past. But House Republicans have said they will not support increasing the borrowing limit this time around unless Democrats agree to spending cuts and other concessions.
In her letter to Congress this weekend, Yellen warned that without action, the US could default on its debt by June. "Failure to meet the government's obligations would cause irreparable harm to the US economy, the livelihoods of all Americans, and global financial stability," she wrote. "Indeed, in the past, even threats that the US government might fail to meet its obligations have caused real harm, including the only credit rating downgrade in the history of our nation in 2011."
Moody's Analytics sees a failure to lift the debt limit as "cataclysmic." Researchers believe the effects would be a GDP decline of almost four percentage points, six million lost jobs and stock prices plunging by a third.
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