The Federal Reserve recently surrendered in its inflation fight. But price inflation is nowhere near the 2% target. Why did the Fed raise the white flag prematurely?
One of the major reasons is debt.
The world is buried under record debt levels and the global economy can’t function in a high interest rate environment.
Fed officials know that and it is certainly one of the reasons they don’t want to raise rates any higher and hope to bring them down as soon as possible.
Over a decade of easy money policies incentivized borrowing to “stimulate” the economy. As a result, governments, individuals, and corporations all borrowed to the hilt. That was all well and good when interest rates were hovering around zero, but when central banks had to hike rates to battle the inevitable price inflation, it pulled the rug out from under the borrow-and-spend economy.
Governments around the world are feeling the squeeze as they try to deal with trillions in debt in a rising interest rate environment.
According to projections by the International Monetary Fund (IMF) global government debt will hit $97.1 trillion in 2023. That represents a 40% increase since 2019.
By 2028, the IMF projects that global public debt will exceed 100% of global GDP. The only other time global debt-to-GDP was that high was at the height of the pandemic lockdowns.
Americans like to brag about being number one. Well, when it comes to debt, they’re right.
The US national debt makes up 32.4% of the total global government debt.
According to the IMF, America’s debt-to-GDP ratio stands at 123.3%.
This chart by Visual Capitalist captures the extent of the problem.
THE DEBT SPIRAL
Unless governments dramatically cut spending and/or raise taxes, this debt spiral will only get worse, especially if interest rates remain elevated.
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