This week, we turn to household debt. Globally, household debt too has grown, albeit at a much slower pace compared to public and corporate debt. As we explained previously, there are some safeguards against excessive borrowings as banks are more vigilant in assessing the credibility of households, who themselves are more cautious due to the direct consequences if they cannot service their debts, including bankruptcy.
There are understandably growing worries over the high level of indebtedness the world over, and especially so given the current environment of rapidly rising interest rates. The recent market meltdown in the UK underscores the rising risks of a broader global financial crisis. The excesses of the past decade, the borrowing binge fuelled by ultra-low interest rates and liquidity, are coming back to bite us, no doubt.
As we wrote a couple of weeks back, governments — especially in developed countries — have been the biggest culprits, using cheap debt to finance massive fiscal spending. Public debt has risen at nearly double the pace of private debt, by 142% in the 13 years from the global financial crisis to 2020. This addiction to debt is particularly difficult for democratically elected governments to reverse. The International Monetary Fund (IMF) recently warned that 60% of low-income countries and about 30% of emerging markets are either in, or at the edge of, a debt crisis. Some of these countries are now spending more on debt servicing (interest payments) than on critical needs such as education and healthcare, and surging yields make it even harder to refinance maturing debts. (That no single developed country is pointed out as facing a similar debt crisis — even though some have among the world’s highest debt-to-GDP ratios — is just a further reflection of the biases and hypocrisies of global institutions, which are increasingly losing credibility.)
