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Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
OK OK, arguing that inflation can have positive side-effects is a lot harder today than a month ago. But it has led to one of the biggest declines in global indebtedness in history — possibly the biggest?
The Institute for International Finance has released its latest global debt monitor, which shows that the ratio of global debt to GDP fell from a post-Covid peak of 357 per cent in 2021 to 327 per cent at the end of the third quarter of 2024.
This is a 30 percentage point reduction in global debt-to-GDP in just four years. Admittedly that only takes us back to the 2019 level, but highly leveraged beggars can’t be choosers.
The reduction is mostly because nominal GDP has been growing a lot faster — thanks largely to inflation — than governments, companies and people can borrow.
The biggest real deleveraging came from the finance industry (which in this case includes bank debt but also things like securitised bonds), but both non-financial companies and governments have seen their debt-to-GDP ratios slashed by about 8 percentage points.
The IIF is naturally more focused on the absolute increase in nominal debt, which admittedly is pretty chunky. In absolute dollar terms, global debt jumped by another $12tn this year, taking the total to a record $322.9tn at the end of September.
And the perennial debt scolds can’t help but warn that things are just going to get worse:
While the pace of global government debt accumulation between 2020 and 2024 was much slower than in the previous four years, large government budget deficits suggest a rapid acceleration in borrowing over the next four years. Global government debt levels are projected to approach $130 trillion by 2028 — around 35% higher than the current level of around $95 trillion.
Moreover, given the chronic underestimation of actual government spending needs in official public debt statistics, debt levels could rise even higher, particularly when accounting for the climate-related spending required to stay on track with net-zero targets and national climate commitments. Under such a scenario, global government debt levels could reach $170 trillion by 2028, with emerging markets expected to record a sharp build-up in external debt as global efforts to mobilize $1.3 trillion of external funding annually to emerging markets by 2035 gain momentum following COP29 in Baku.
However, what matters is the size of the debt burden relative to the size of the economy. And in this regard, inflation has been an enormous boon (even if the corollary is that it’s been a complete nightmare for lenders).
It’s easy to forget that a paucity of inflation was actually one of the biggest problems the global economy struggled with in the wake of the 2008 financial crisis. It might end up being again — even if that isn’t a popular argument to make right now.
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