Martin Wolf, the leading columnist of the Financial Times, dedicated last week’s column to the dangers posed by rising global debt. Although as early as 1989 there were authors warning that budget deficits could not pump debts indefinitely, borrowing by governments in developed and developing countries is growing at a rate of six percent per year. Yet, there is still no financial and economic collapse as one would expect. The latest forecasts warn that the ratio of public debt to GDP in developed countries will jump to 120 percent, and in developing countries to 80 percent. These will be records not seen since the end of World War II.
It seems that the foundations of economic teachings no longer hold. No one is raising the alarm. And creditors are dead calm. If there has been no collapse all these years, surely there will not be one in the future.
The author of ‘Ekonomalija’ occasionally feels the urge to check at the Faculty of Economics what the procedure is for returning a diploma. However, frustration was somewhat alleviated by the FT columnist citing a quote from the famous German macroeconomist (who spent most of his career in the U.S.) Rüdiger Dornbusch: ‘In economics, things take longer to happen than you think, but then they happen faster than you can imagine.’
Head in the Sand
This is not about invoking a global debtor, and consequently economic collapse on a global scale. The fears due to climate change and the increasing number of armed conflicts are sufficient. It is about drawing attention to an inevitable scenario that will happen sooner or later. And the need for the government, Croatian for example (whichever it may be; this Leader in digital edition is published on the day of the electoral silence), to take into account the fact that the prospects for a serious global recession are increasing in possible scenarios. Of course, one could bet that this will not happen for at least another four years, and after that, who is politically alive, who is dead. Given that debtors around the world have learned to enjoy cheap sources of borrowing for years as new billions have been recklessly released into circulation, even a minor increase in interest rates has been declared a disaster. As soon as inflation calmed down a bit, pressures are now rising again to lower interest rates.
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Global debt is at a new record high of 313 trillion dollars (a trillion is a million million). Ten years ago, it was only 210 trillion dollars. In such circumstances, when it seems that borrowing has no upper limits, the question arises whether those who stick to low budget deficits are wiser or those leaders who unhesitatingly borrow for their states and future taxpayers. Thus, in many articles, Germany is mocked for stubbornly adhering to low state deficits and allowing the market to cleanse the national economy of non-competitive companies through bankruptcies.
This approach is not in vogue in the 2020s. The public, starting with the media, admires the accelerated examples of economic growth in the U.S. or China, and in the closer neighborhood of Hungary. No one asks where the governments of these countries get the money to finance the military industry, the real estate sector, or for generous subsidies to their industries. No one looks at the numbers that show that not all of this is realized added value of national economies. Rather, it is largely pushed by borrowing.
This largely explains where Hungarian entrepreneurs get so much capital to buy ‘half of the Adriatic’, and they would buy all of Slavonia and Baranja if the hosts were not embarrassed to sell themselves completely. Besides, there is the question of what the debtor-creditor balance with Russia is, Hungarian budget deficits (six percent relative to GDP) are funneled through complex operations into favorable loans for government-friendly entrepreneurs to expand into neighboring countries.
Budget Holes
Now someone might notice that there are exceptions. Russia, for example. Whose state finances, despite military expenditures and international sanctions, are in a sustainable phase. The answer lies in the borrowing of other countries. In an effort to stay in power as long as possible, political authorities in the West pump consumption growth in their countries through borrowing. The growth in demand raises the price of raw materials. Countries that have raw materials profit. It could even be said that the prolonged increase in global debt levels affects the ability of many countries to engage in military adventures.
One could also posit the thesis that the pumping of global growth through the printing of cheap money and easy borrowing is the reason why many autocrats manage to stay in power for ten years or more. Borrowing that can constantly be increased and reprogrammed can populistically buy the favor of the people.
