A Debt Fiesta
We will borrow until we can borrow no more. Nation-states currently have massive debt obligations and limited discipline to reduce these growing debt mountains. The current trend of federal government spending in excess of tax collections will continue to increase as fractured political systems are unable to deal with growing budgetary issues.
The graph below depicts federal debt as a percentage of GDP which measures debt vs. the size of an economy. The nation-states presented below make up more than half of the world’s GDP. One will notice the upward trend, particularly the average which has climbed from 37% to more than 125% over the past 50 years. This pace is not sustainable and will inevitably lead to financial catastrophe.
It is only a matter of time until debt investors, also known as the bond vigilantes, reject the inability of nation-states to service their debt. A couple of other crucial points about the nation-state Debt Fiesta:
- Even before a missed debt payment, the brinkmanship conducted by political parties to default on public obligations adds volatility and uncertainty to financial markets.
- When too many private sector firms have over-borrowed or not properly planned for crisis moments, the nation-state government and monetary authority step in to bail them out by issuing more government debt. This debt absorption phenomenon distorts financial markets by mispricing risk, and enables irresponsible firms to benefit from public funding. Ultimately, the taxpayer is bailing out private enterprise. Were tax pools smaller, the scale of this irresponsible moral hazard would be greatly reduced.
Sources: International Monetary Fund| https://www.imf.org/external/datamapper/GG_DEBT_GDP@GDD/SWE