The world is drowning in debt.
And central bank policies globally are encouraging even more borrowing. Most people don’t seem to care. “This is necessary during this time of crisis,” has become the mantra. But the ugly truth is the world was already drowning in debt before the coronavirus pandemic. The government response to COVID-19 has merely exacerbated the problem. And it’s important to understand that debt is neither free nor irrelevant.
Just look at the US government budget deficits. The shortfall in the month of June totaled nearly the entire 2019 fiscal year deficit and would rank sixth largest-ever if it were a yearly deficit.
The June deficit came in at $864.1 billion dollars. To put that into perspective, here are the biggest annual budget deficits in US history.
2009 – $1.413 trillion (G.W. Bush/Obama)
2011 – $1.300 trillion (Obama)
2010 – $1.294 trillion (Obama)
2012 – $1.077 trillion (Obama)
2019 – $984 billion (Trump)
June 2020 – $864 billion (Trump)
Of course, Uncle Sam was already hurtling toward a $1 trillion deficit for fiscal 2020 before the pandemic.
It’s not just governments running deeper and deeper into the red. The second quarter was the busiest ever for corporate debt issuance. Approximately $1.2 trillion of investment-grade paper was sold in the first half of the year. It was the highest issuance volume recorded by the Securities Industry and Financial Markets Association.
Corporations were leveraged to the hilt before the pandemic. So much so that the Federal Reserve issued warnings about the increasing levels of corporate indebtedness late last year.
Borrowing by businesses is historically high relative to gross domestic product (GDP), with the most rapid increases in debt concentrated among the riskiest firms amid weak credit standards.”
The Fed’s response to COVID-19 was to wade into the corporate bond market and this has only exacerbated the debt problem.
Economist Daniel Lacalle highlighted just how much global debt has grown in an article published by the Mises Wire.