Global National Debt Hits Highest Since World War II

[Asia Economy Reporter Byunghee Park] The Wall Street Journal (WSJ) reported on the 12th (local time) that the global government debt has increased to the highest level since World War II.

WSJ explained that government debt has surged due to the COVID-19 pandemic, surpassing the size of the world's annual total production. According to the Institute of International Finance (IIF), global government debt was at 88% of annual Gross Domestic Product (GDP) before COVID-19, but this ratio rose to 105% last year. WSJ added that debt is still increasing, especially among advanced countries with fiscal capacity. IIF forecasts that global government debt will increase by an additional $10 trillion this year, reaching $92 trillion.

Opinions on the sharp rise in government debt are divided.

Proponents of increased government spending view it positively, believing it can stimulate global economic growth. They diagnose that it provides a turning point for advanced countries struggling with slowing growth rates. On the other hand, there are considerable counterarguments that increased government spending triggers inflation, tax hikes, and debt defaults.

WSJ analyzed that, regardless of the controversy over the surge in government debt, financial markets seem unconcerned. Despite governments significantly increasing their debt, large-scale investments are being made in government bonds issued by various countries. As a result, government bond yields remain low worldwide.

The U.S. government fiscal deficit is expected to exceed $3 trillion for the second consecutive year. Although large-scale government spending is driving up inflation, the 10-year Treasury yield remains low at 1.33%. It once exceeded 1.7%, but the recent downward trend is clear.

[Photo by Reuters-Yonhap News]

Japan’s government debt is also poised to exceed 1,000 trillion yen. Japan’s government debt-to-GDP ratio exceeds 250%, but the Japanese government is issuing government bonds with almost no interest payments, similar to the 1980s when the debt ratio was only two-thirds of GDP. The U.S. think tank Peterson Institute for International Economics estimates that Japan has poured $800 billion into economic stimulus since the COVID-19 outbreak. This amount corresponds to one-sixth of Japan’s annual production.

Emerging countries such as China and India have also significantly increased government spending. If U.S. interest rate hikes materialize, the repayment burden of developing countries with large dollar-denominated debts will inevitably increase.

Regarding why government bond yields remain low despite the sharp increase in government debt, Paul Shard, a researcher at Harvard Kennedy School, explained that there is no longer a need to worry about debt. He said, "The world has changed and the intellectual system has evolved," adding, "We no longer need to worry about debt." This can be interpreted as meaning that the increase in government debt is an unavoidable reality.

Some experts argue that countries around the world need to increase fiscal spending to recover their economies considering the COVID-19 situation and others. They claim that a certain level of inflation or interest rate hikes is not a big problem for governments with large debts. When inflation occurs, nominal GDP and tax revenues increase, which can actually reduce the burden of debt repayment. According to WSJ, inflation after World War II helped Western countries such as the U.S. and the U.K. repay their debts.

Also, the experience of the 2008 global financial crisis is used as a rationale supporting the expansion of government debt. Countries that showed a passive attitude toward fiscal spending at that time faced great difficulties in recovering their economies.

This content was produced with the assistance of AI translation services.