When it comes to a country’s overindebtedness, the four most dangerous words are “This time is different.”
As Harvard’s Kenneth Rogoff and Carmen Reinhart taught us in their magisterial book “This Time Is Different: Eight Centuries of Financial Folly,” unless addressed promptly, overindebtedness almost always ends in tears — an economic, banking or exchange-rate crisis.
How much more should we be worried about the world’s long-run economic outlook?
It’s not only a single major country with troubling debt.
Each of the world’s major economies has a serious debt problem caused by too many years of irresponsible budget policies and zero interest rates — and could make it all the more difficult to avoid a recession and renewed financial strain at home.
Take the United States, the world’s largest economy.
At a time of cyclical economic strength, when the country should be running a budget surplus, it’s managing to run a deficit of around 6% of gross domestic product.
On present policies, such deficits will continue as far as the eye can see, according to the nonpartisan Congressional Budget Office.
That in turn will take us to public-debt interest payments exceeding those during World War II in relation to the size of the economy.
Since our government borrows in dollars, there’s little chance we’ll default on the debt even if it reaches astronomical levels.
The Federal Reserve can always print money to repay it.
But there is a great chance such money printing will lead to ever-higher inflation and a dollar crisis.
Unfortunately, we have not only a public-debt problem but a commercial-property-debt problem.
Over the next two years, almost $1.5 trillion in commercial-property debt matures.
With post-COVID vacancy rates at record levels and interest rates much higher than in the days of easy money, it’s difficult to see how such debt can be rolled over without major debt restructuring.
This makes it only a matter of time before we see a wave of regional-bank defaults that could shake the financial system as Silicon Valley Bank and First Republic Bank failures did last year.