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The U.S. Treasury building in Washington, DC. U.S. government debt hit a record $34 trillion last week, larger than the size of the U.S. economy.
London
CNN
—
World leaders are gathering in Davos this week to brag about the planet’s most pressing issues.
Two major wars, shipping crises, cyberattacks on national institutions, and even more alarming evidence of a climate emergency keep us talking.
But turning ideas into action will be difficult when governments are owed an unprecedented $88.1 trillion (roughly equal to the world’s annual economic output).
Public debt has soared during the pandemic, with new borrowing likely to break records in several large economies this year, leaving governments less able to respond to shocks such as financial collapses, pandemics and wars. .
Even if no new crisis emerges, rising debt servicing costs will constrain climate change and efforts to tackle it. Consideration for an aging society.Public services are already strained in many countries Successive budget cuts.
A further concern is that as debt burdens increase, governments may not be able to borrow any more to service existing debt and adequately fund basic services.
Michael Saunders, a former member of the Bank of England’s Monetary Policy Committee, said governments unable to repay their debts would be forced to make “sudden and painful” spending cuts and tax increases.
“Such a government may lack the fiscal space to respond to future negative impacts and may be unable to provide financial support when it is most needed,” he told CNN.
Sanders, now a senior economic adviser at consulting firm Oxford Economics, does not believe rich-country economies are close to reaching personal credit limits, and investors’ appetite for government debt remains strong. It points out what is being done. However, that does not mean that its limits will not be tested “10, 20, or 30 years from now”.
Britain, the world’s sixth-largest economy, has issued a warning about how bad things could get if investors reject the government’s borrowing plans.
In September 2022, the pound and British government bonds (gold coins) plummeted following former chancellor Liz Truss’ plans to issue more bonds to pay for tax cuts. Mortgage rates and other borrowing costs soared as investors demanded a much higher premium for holding British government bonds.
The Bank of England was eventually forced to intervene, pledging to buy government bonds “to whatever size is necessary”.
“If this market dysfunction continues or worsens, there will be significant risks to the UK’s financial stability,” senior central bank official Dave Ramsden said at the time. “This…will lead to a reduction in the flow of credit into the real economy.”
Central banks can provide temporary supplies, but Even emergency aid cannot finance government deficits on behalf of bond investors.
Just ask crisis-hit Argentina. In Argentina, the central bank has been printing pesos for years to help the spendthrift government continue paying interest on its debts and avoid defaulting. This tactic caused the value of the currency to collapse and prices to soar. Annual inflation exceeded 211% last month, the highest level in 30 years.
Government budgets will come under new scrutiny this year from investors, who are tempted by politicians’ promises to win over voters.
Half of the world’s population goes to vote.This wide-ranging election means little incentive for tensions between the incumbent government, while the next leader We’re trying to make a mark with a new tax and spending plan.
Debt is already becoming a key issue in this year’s U.S. presidential election, which will culminate in November’s presidential election. Record levels of public borrowing have become a major point of contention between Republicans and Democrats, exacerbating conflicts over the national budget and regularly draining federal agencies of funding and hampering their operations. There is a risk of being exposed.
Rising debt and political brinkmanship have already taken a toll on America’s credit ratings, typically affecting borrowing costs for governments, businesses and households.
Last August, Fitch downgraded U.S. government bonds from the highest grade, AAA, to AA+, citing political polarization as a deciding factor. Meanwhile, Moody’s warned in November that the last remaining perfect rating for the United States could be removed from the three major rating agencies.
Raghuram Rajan, former governor of the Reserve Bank of India, said: “One of the key factors in maintaining a country’s confidence in its (debt) repayment capacity is political consensus.”
He added that it is not inconceivable that the value of U.S. debt could decline “if there is concern about democratic decline and political disaster in the United States.” And that will increase the government’s borrowing costs.
Even if the worst-case scenario is averted, increasing debt servicing costs due to the recent rapid rise in official interest rates will siphon increasingly large amounts of funds from essential public services, making it harder to tackle the climate crisis. I am.
Britain’s main opposition party, the Labor Party, has scaled back some of its huge green spending plans, according to reports in the British media. This is because there are concerns that the country’s debt burden will further increase.
In the current financial year, which ends on April 5, the UK government is expected to spend more on debt interest (£94 billion, or $120 billion) than on education and education. According to the Office for Budget Responsibility, a fiscal watchdog,
Interest costs under the common measure soared to $659 billion in the U.S. in fiscal year 2023, which ended Sept. 30, according to the Treasury Department. This is a 39% increase over the previous year and almost double the amount in 2020.
According to the nonprofit Committee for a Responsible Federal Budget, the government spent more on debt service in 2023 than it did on each of housing, transportation, and higher education.
Rapid rise in debt in developed countries partly explained by high interest payments At the same time, we are seeing a slowdown in economic growth and an increase in the number of older people relative to the working-age population. Against this backdrop, it is unclear how the world will get out of the debt hole.
“The relatively easy thing to save us is to significantly increase productivity without losing jobs,” Rajan, now a professor of finance at the University of Chicago Booth School of Business, told CNN. It suggests that artificial intelligence may hold the key.
In fact, many experts believe that an AI-powered productivity boom could change the fate of the global economy.
let’s hope for that Over the next few days in Switzerland they showed us how to do it.
Anna Cuban contributed reporting.
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