Nov 15, 2019

Capital markets are eyeing the world's soaring debt

Illustration: Aïda Amer/Axios

The world's debt is rising to unprecedented levels. While politicians and the general public have seemingly lost interest, capital markets are beginning to show signs of strain, financial experts say.

Driving the news: Global debt surged by $7.5 trillion in the first half of the year, hitting a new record of more than $250 trillion, according to data released Thursday from the Institute of International Finance.

  • The world's debt has now risen to 320% of what it produces, the highest level recorded — and IIF economists say they see "no sign of a slowdown."
  • They expect the global debt load to exceed $255 trillion by the end of the year.
  • The U.S. budget deficit rose 34% in October from a year earlier, and the U.S. and China are leading the debt binge with more than 60% of the world's total, IIF notes.

What's happening: It’s all starting to add up, experts say.

  • U.S. government debt auctions this year have been strained.
  • The systemically important repo market that banks use for cash buckled in September, necessitating hundreds of billions of dollars of cash infusions from the Fed.
  • The government is exploring reintroducing 50- and 100-year bonds to alleviate stress in the debt markets.

Threat level: While these are hardly mainstream economic indicators, the recent troubles in U.S. capital markets "may be an early warning of a digestion problem," Catherine L. Mann, global chief economist at Citi, said during last month's National Association for Business Economics meeting.

The big picture: "This is the longest expansion in history, but it is also the weakest and part of that is the extremely high debt," Liz Ann Sonders, chief investment strategist at Charles Schwab, tells Axios.

  • "The effect may be a subtle crisis over time, like we have seen with just a depressing pressure on growth," she adds.

Be smart: Even Fed chair Jerome Powell, who has been consistently upbeat and focused almost exclusively on the strengths of the U.S. economy, was dour in his assessment of current U.S. debt levels.

  • “The federal budget is on an unsustainable path, with high and rising debt,” Powell told the Joint Economic Committee Wednesday. “Over time, this outlook could restrain fiscal policymakers’ willingness or ability to support economic activity during a downturn.”
  • “I remain concerned that high and rising federal debt can, in the longer term, restrain private investment and, thereby, reduce productivity and overall economic growth.”

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The market will need the Fed again in 2020

Illustration: Aïda Amer/Axios

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