With every passing year, the World’s debt is slowly climbing. This increase in debt can be compared to a bubble waiting to burst. Although as a whole, debt is falling (in some countries), the amount of debt around the world is still historically high. The reason for the historically high amounts of debt is based on the glowing growth of the economy tied in with inflation falling, which causes interest and debt payments to rise. This so called ‘poison‘ combination causes households to simply not pay off debt collected. BBC reports, “There has also been a fall in inflation rates in many countries. Inflation can help limit debt burdens. Household incomes, company revenues and government tax receipts all rise but debt payments are often fixed. Low inflation, especially if it is lower than borrowers expected when they took their loan, weakens that process and leaves debt burdens heavier than they would have been.”
A major factor in this crisis is that Asian countries, in particular China, which is one of the largest players in the world’s economy has an extraordinary high peak in debt in the recent years. “In the case of China, the report describes the rise in debt as “stellar”. Excluding financial companies it has increased by 72 percentage points to a level far higher than any other emerging economy.” According to a BBC article, Turkey, Thailand, and Argentina have marked high increases in debt.
As for the US and UK, have been doing their part in terms of lowering the debt. Even though the government debt has been rising in both countries, which will most likely continue to rise, the household debt problem in these countries have dropped significantly. This can be accredited to a stable economy which leads to households paying back loans at a lower interest rate. Even though the World debt is getting to a point which is unsafe, Mark Carey of the US Federal Reserve believes the US is doing OK, “he would have toned down a little the size of the disaster we are facing, and that the situation is not as bad as described. He said there is no obvious downtrend in economic growth and pointed out that a great deal of American debt has a variable interest rate. That would reduce the debt burden as inflation falls.”
We can only hope that trends begin to change because once that bubble bursts the world’s economic state could go haywire. For more on this issue, please visit BBC‘s article on the World Debt Issue.