The next US administration is likely to face a global debt crisis that could eclipse what the world experienced in 2008-2009. To avoid the worst, he will have to tackle the heavy debt that plagues both the United States and the global economy.

Even before the COVID-19 pandemic crippled economies around the world, economists were warning of unsustainable debt in many countries. Take the United States: increased spending to mitigate the health and economic impacts of the pandemic has raised total public debt in the United States to over 100% of GDP, its highest level since 1946 and a hurdle that will create a considerable drag on future economic growth. Other types of debt (household, auto and student loans, as well as credit card debt) have seen similar increases. Almost 20% of American businesses have become zombie companies unable to generate enough cash to pay off the interest on their debt, and only survive on continued loans and bailouts.
A new administration will need to act quickly and deftly to avoid outright default scenarios at home and abroad.

Multiply that across the world. Total global debt reaches unsustainable level 320% of GDP. Perhaps more worryingly, China is now a major creditor, adding a geopolitical dimension to debt concerns. China is the largest foreign lender not only to the United States, but also to many emerging economies. This gives the Chinese political class enormous leverage. Understandably, the combination of strained US-China relations and the dependence of many advanced and developing countries on continued Chinese credit and investment limit the scope of negotiations on debt restructuring or moratoria. .

The next US administration is likely to face a global debt crisis that could eclipse what the world experienced in 2008-2009. To avoid the worst, he will have to tackle the heavy debt that plagues both the United States and the global economy.

Even before the COVID-19 pandemic crippled economies around the world, economists were warning of unsustainable debt in many countries. Take the United States: increased spending to mitigate the health and economic impacts of the pandemic has raised total public debt in the United States to over 100% of GDP, its highest level since 1946 and a hurdle that will create a considerable drag on future economic growth. Other types of debt (household, auto and student loans, as well as credit card debt) have seen similar increases. Almost 20% of American businesses have become zombie companies unable to generate enough cash to pay off the interest on their debt, and only survive on continued loans and bailouts.

Multiply that across the world. Total global debt reaches unsustainable level 320% of GDP. Perhaps more worryingly, China is now a major creditor, adding a geopolitical dimension to debt concerns. China is the largest foreign lender not only to the United States, but also to many emerging economies. This gives the Chinese political class enormous leverage. Understandably, the combination of strained US-China relations and the dependence of many advanced and developing countries on continued Chinese credit and investment limit the scope of negotiations on debt restructuring or moratoria. .

The world situation has become even more complicated because many of the conventional ways of dealing with excess debt no longer look like credible options. For example, with the IMF forecasting the global economy to contract 4.4% in 2020, it seems unlikely that countries can simply get out of debt. Conventional or even unconventional monetary policies are also unlikely to provide relief: Interest rates in most developed economies are already historically low or even negative, and central bank balance sheets are stretched relative to the policies that ‘they have followed since the 2008 financial crisis and spread throughout the pandemic. Stacking debt on debt seems to have reached a dead end.

A growing number of economists and policymakers are starting to talk about the need to move to a new, possibly digital, monetary regime, the contours of which remain unclear. With the pandemic and its economic fallout showing few signs of slowing down, it could be the next administration that will have to manage this complicated national and international transition with all its potential for financial, social and political instability.

Even in the absence of such a difficult transition, policymakers in a new administration will need to act swiftly and deftly to avoid outright default scenarios at home and abroad. The default would severely limit the ability of governments to respond to pressing concerns such as public health, economic recovery and climate change. A full-blown debt crisis would be devastating for the entire world economy and for the prospects for human progress.