The Debt Bubble
Arthur Lyon Dahl
14 July 2023
I have long warned that one of the catastrophes threatening our civilization, alongside our triple planetary crises of climate change, biodiversity loss and pollution, or a third world war and nuclear holocaust, would be the bursting of the giant debt bubble behind our world economy. Recent studies and reports have demonstrated how frightening and fragile this debt bubble has become. If it bursts, with widespread defaulting around the world and the collapse of major currencies, we would experience a world economic depression, as trade would largely halt, our consumer society would end, and urban populations would be trapped with no means to survive. The survivors would be the rural poor still at a subsistence level outside the global economy, and small communities with strong enough solidarity to muddle through the crisis.
The UN Global Crisis Response Group has just issued its report in July 2023 “A World of Debt: A growing burden to global prosperity” (https://unctad.org/world-of-debt). Its focus is on the debt burden of the developing countries, and the figures are alarming. Global public debt has reached $92 trillion, up from $17 trillion in 2000. Thirty percent of this is owed by developing countries, and is growing faster, more than tripling since 2010. In 2020, seventy countries had public debt exceeding 60 percent of GDP. The unfair international financial architecture means that this debt burden is greater in the Global South facing cascading crises and high and rising borrowing costs. Half of developing countries are allocating at least 7.4 percent of their export revenues to external public debt servicing, when anything over 5 percent undermines recovery. They are more dependent on private borrowing and pay much more for it. In 2020, 54 developing countries had net interest payments exceeding 10 percent of revenues, and these payments are growing faster that other public expenditures, increasing 60 percent since 2010. 3.3 billion people live in countries that spend more on interest than on education or health. As they suffer more from loss and damage due to climate change without adequate compensation, this is a trap from which they cannot easily escape.
More generally, growing debt has been essential to maintain the materialistic world economy, with consumers borrowing to buy, corporations borrowing to grow, and governments borrowing for unproductive military expenditures and essential public services while reducing taxes on corporations and the wealthy. It is considered normal to barely manage interest payments, and debts may be rolled over, but there is no conceivable way that they all could be reimbursed. Most of the money supply is created by banks through their lending, not by government issue. The most publicly-indebted countries with over $1 trillion in debt are the United States $30,985 billion; China 13,955; Japan 11,061; United Kingdom 3,152; France 3,092; Italy 2,911; India 2,815; Germany 2,711; Brazil 1,653; and Spain 1,568.
As the most indebted country, the United States is expected, according to the Congressional Budget Office, to run an annual federal deficit of $2 trillion over the next decade, with the interest of over $1 trillion exceeding the national defense budget, and a public debt of $45 trillion by 2033, which would be 115 percent of the nation’s annual economic output. How long can this continue?
To address the global debt storm and achieve sustainable development, the global financial architecture needs major reform. The Global Crisis Response Group has made some proposals for international institutional reform. The larger problem is the whole financial system itself, with banks and investors speculating and profiting using money to make money, and nations leveraging their currencies for political ends, totally divorced from the real economy producing goods and services, and many times larger in financial worth.
Perhaps the best thing that could happen, in comparison with other potential catastrophes, would be for the debt bubble to burst. While it would be painful and many would suffer, this could shut down the trade in fossil fuels and save us from a climate catastrophe, halt the destruction of tropical forests to supply the world market, slam the brakes on the multinational agroindustries destroying soils and spreading polluting chemicals, and enable a rapid transition to more moderate, smaller scale, regenerative and sustainable economic systems. We would do well to prepare for that eventuality, and whatever happens, that can do no harm.
Last updated 14 July 2023