The world debt currently is 279,000,000,000,000 USD.
The number of zeros here is baffling indeed.
In today’s article we will understand 3 key things. These are-
- Who is giving the world this debt?
- What is going to happen in case this debt bubble bursts?
- How can we use debt to make more money?
Let us take a look at the split of the layers of debt that exists in the world right now. The data below, is taken from IMF and can help us understand the bifurcation of debt very clearly.
Debt layer #1- Public Debt (Indicated in orange)
This is the government debt and it has been constantly going up.
During the global financial crisis and COVID 19, there was a sudden spike in this debt because the government borrowed a lot of money.
Overall, you can easily understand the upward trending curve represented by the orange bar which indicates the debt that is there in the world.
Debt layer #2- Private Debt (Comprises of corporate debt, household debt, indicated in blue)
a) Household debt 👉 debt taken by people like you and me.
b) Private debt 👉 debt taken by companies.
When companies like ITC, HUL, Nestle come out with their bonds (not equity), essentially, they are taking debt.
When we take a loan from the bank, we are borrowing money on which we have to pay ROI. Similarly, when these corporations issue bonds, they are taking loans from the i. public and ii. large institutional players.
Now, coming back to talking about public debt-
Are all government debts the same? The answer is absolutely not.
1) Owning debt in your own currency.
When we consider countries like the US and China, the majority of the debt they take, is in their own currency. This means that these countries are printing money and giving themselves a loan.
This type of debt is obviously less problematic.
2) External debt.
This is taken in external currency.
Currently, Turkey is going through a massive macro-economic recession. This is because the majority of its loan was taken in USD.
When the global pandemic hit, countries like Turkey, which have a lot of external debt, their macro-economics collapsed.
As a result, they started defaulting which led to their currency weakening even more.
In over-simplified terms, this is a balance of payment crisis.
So, long story short, if a country owes debt in its own currency, it is not a big deal. But if a country is borrowing money externally, it can lead to a crisis.
Now, an obvious question might arise.
Why can’t all the countries just print their own money and give themselves debt?
If a country like India decides to print an insane amount of money, we would have something called sovereign risk. In simple terms, this means that our economy is not as strong as China or the US’ economy.
Another question might arise, why can the US get away with printing an insane amount of money?
This is because the US is the reserve currency of the world. Unless we can find an economy stronger than the US, we can’t abandon it and till then, the US too won’t be frugal in terms of how it prints money.
As you can see from the data above, advanced economies have taken more debt compared to anyone else.
But if you take a look at emerging markets, the increase in debt taken is lesser compared to advanced economies.
This is because advanced economies like the US and China have taken more debt by printing their own money in 2020. India and other economies of its likes, do not have the clout to go and print an insane amount of money.
So, the entire discussion boils down to- US and China are printing a lot of money, simply because they can and India cannot.
Now, can this debt bubble go back to a smaller shape?
There are 3 ways to deal with this high debt problem.
1) Governments will need to increase taxes.
Once the government increases taxes, they will make more money and then they can repay the debt. In the US and China, they will repay it to themselves. In countries like India, they will repay the IMF and other developed economies from whom they have taken the debt.
Now, here is the funny part. These are the taxation rates for India-
We are already hitting 43-44% in terms of taxation. Will people be okay paying more than 50% taxes?
2) Increase in productivity
With upcoming technologies like the block-chain and further advancements in health-care and a bunch of other sectors, if the productivity of people can go up, the world will be able to repay its debt.
By increasing productivity, there will be an increase in salary. Imagine if you are currently making 1L rupees, but with the advancement in tech and increase in productivity, you are able to make 5L. This is what the world is banking on.
3) Leave it to the future generation
Let us just print as much money as we want and leave it to the future generations to deal with it.
So this is how the world is currently dealing or not dealing with global debt.
Will this bubble burst?
At the end of the day, it is all a belief system. As long as the world believes that China and the US won’t default, the debt bubble will continue to exist in the advanced economies at least.
Weak countries right now, like Pakistan, Sri Lanka, Turkey are going through a macro-economic collapse, because their economy is weak. Their leadership is also weak.
If this debt problem continues, even if it is created by the US and China, countries like India will be impacted more than the US and China themselves.
How can you use debt to make money in this environment?
1) Go and invest in bonds.
The feds are hiking the bond interest rate in the bonds market. Hence, bonds will become a lucrative option.
2) Take a home loan.
The debt on a housing loan right now is very low. So you can save some money in terms of taking a home loan.
Do make sure it is not a floating interest rate type of home loan.
3) Take a business loan.
Banks have excess liquidity. They are sitting on a lot of cash, which they want to give out in the form of loans.