With global borrowings reaching a record of $307.4 trillion in September of last year, economist Arthur Laffer has warned that the world faces a debt crisis that will persist for the next ten years and that things won’t end well.
The amount of debt held by both developing markets and high-income nations has increased significantly, rising by $100 trillion from a decade ago, driven partly by a high interest rate environment.
“I predict that the next 10 years will be the Decade of Debt. Debt globally is coming to a head. It will not end well,” President of investment and wealth advisory Laffer Tengler Investments, Laffer, said to CNBC.
Debt now accounts for 336% of the world’s gross domestic product. In contrast, the average debt-to-GDP ratio for developed economies was 110% in 2012, while the average for emerging economies was 35%. The Institute of International Finance’s most recent global debt monitor report states that as of the fourth quarter of 2022, it was 334%.
It is predicted that about 100 countries would have to reduce their expenditures on vital social infrastructure, such as social safety, health care, and education, in order to pay down their debt.
According to Laffer, nations that are successful in improving their financial status stand to gain from the influx of foreign talent, cash, and investment, while those that fail to do so risk losing out on talent, income, and other benefits.
“I would expect that some of the bigger countries that don’t address their debt issues will die a slow fiscal death,” Laffer said, noting that some developing nations “could quite conceivably go bankrupt.”
More than 80 percent of the debt accumulation in the first half of last year came from mature markets including the United States, the United Kingdom, Japan, and France. China, India, and Brazil, on the other hand, experienced the most notable rises among emerging markets.
The economist issued a warning, stating that as the population in industrialized countries ages and labor becomes more scarce, servicing the debt will become a bigger problem.
“There are two main ways to cover this issue: raise taxes or grow your economy faster than debt is piling up,” he said.
Laffer’s remarks follow the US Federal Reserve’s January rate-stay decision and debunking of expectations for a rate reduction in March.