A mosaic collection of world currencies.
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The world is facing a debt crisis that will stretch over the next decade and will not end well, economist Arthur Laffer has warned. Global debt hit a record $307.4 trillion last September.
Both high-income countries and emerging markets have seen significant increases in their debt piles, increasing by $100 trillion compared to a decade ago, in part due to the high interest rate environment.
“I expect the next ten years to be the decade of debt. Global debt is escalating. This is not going to end well,” Laffer, president of investment and wealth advisory firm Laffer Tengler Investments, told CNBC.
The share of debt in global gross domestic product has risen to 336%. This compares to an average debt-to-GDP ratio of 110% in 2012 for advanced economies and 35% for emerging markets. According to the latest Global Debt Monitor report from the Institute of International Finance, it was 334% in the fourth quarter of 2022.
It is estimated that around 100 countries will have to cut spending on key social infrastructure such as health, education and social protection in order to pay off their debts.
Countries that manage to improve their fiscal positions could benefit by attracting labor, capital and investment from abroad, while countries that fail to do so could lose talent, revenue and more, Laffer said.
“I expect that some of the larger countries that don’t address their debt problems will die a slow fiscal death,” Laffer said, adding that some emerging markets “could conceivably go bankrupt.”
Mature markets such as the US, UK, Japan and France were responsible for over 80% of the debt build-up in the first half of last year. While China, India and Brazil recorded the strongest growth in the emerging markets.
The economist warned that debt repayment will become a bigger problem as populations in developed countries age and labor becomes more scarce.
“There are essentially two ways to address this problem: raise taxes or let the economy grow faster than the debt accumulates,” he said.
Laffer’s comments follow the Federal Reserve’s decision to keep interest rates unchanged in January and the dashed hopes of a rate cut in March.