LONDON — For decades, suffocating debt has spread misery in the world’s poorest and lowest-income nations. But the threat of unsustainable debt that now hangs over the global economy emanates from some of the richest countries.
Record or near-record debts in the United States, Britain, France, Italy and Japan threaten to halt growth and sow financial instability around the world.
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Domestically, this means that countries need to make interest payments on resources that could otherwise have gone to health, roads, public housing, technological advances or education.
The growing appetite for more loans has also driven up financing costs, taking a bigger slice of taxpayers’ money. This could also raise rates on business, consumer and vehicle loans, as well as mortgages and credit cards; and pressure inflation.
And perhaps most worrying: Accumulated debt—inflated even when the economy is relatively healthy and unemployment rates are low, as in the United States—gives governments less room to react when things get worse.
“You want to be able to spend a lot and spend quickly when you need to,” said Kenneth Rogoff, an economics professor at Harvard University.
What happens if there is a financial crisis, a pandemic or a war? What if a sudden need for more spending on social services and unemployment benefits arises because of changes driven by artificial intelligence or climate-related disasters?
Borrowing large amounts of money quickly becomes more difficult — and expensive — when the national debt is already sky-high.
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At the World Economic Forum in Davos last week, President Donald Trump took center stage, but behind the scenes, finance ministers were uneasy about his ability to fund a growing list of priorities, from a beefed-up military to modernized power grids.
Government borrowing when the economy is strong, and when interest rates are low, can support growth and, in tight times, help bolster spending.
The turbocharged lending cycle began with the financial crisis and recession of 2008, when governments rushed to provide assistance to struggling families and tax collections fell.
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Relief programs during the Covid-19 pandemic, when businesses closed and healthcare costs soared, raised debt levels another notch as interest rates rose and outpaced growth.
But debt levels have not declined. And now, in six of the wealthy G7 nations, national debt is equal to or greater than the country’s annual economic output, according to the International Monetary Fund.
More and more countries are being squeezed by demographic factors and slow growth. In the European Union, Britain and Japan, aging populations have driven up government spending on health and pensions while the number of workers providing the necessary revenue has shrunk.
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The need to rebuild infrastructure and invest in advanced technology in many regions is also urgent.
A year-long study commissioned by the European Union’s executive arm concluded that the 27-member bloc would need to spend an additional $900 billion in areas such as artificial intelligence, a shared energy grid, supercomputing and advanced workforce training to compete effectively.
In Britain, at least 300 billion pounds ($410 billion) will be needed to modernize infrastructure over the next decade, according to the Future Governance Forum, a London think tank. Billions more will be needed to revitalize the faltering National Health Service.
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Efforts to cut public spending in Italy, where debt amounts to 138% of gross domestic product, through reductions in health, education and public services, or in France, by raising the retirement age, have triggered vehement protests.
France, which has been politically paralyzed for months over the budget, saw its sovereign credit rating downgraded last fall, raising doubts about the country’s financial stability.
Meanwhile, the world has become more dangerous. Tensions between China and the United States have intensified. Europe is threatened by an increasingly aggressive Russia and a belligerent American president.
Most countries responded by significantly supporting Ukraine with billions of dollars and increasing military spending. Members of the North Atlantic alliance agreed to allocate 5% of their gross domestic product to defense in the future. Japan is also substantially expanding its military budget.
Tokyo’s debt is already staggering. It is equivalent to more than double the country’s annual economic production.
The prospect of an even deeper hole grew last week when Prime Minister Sanae Takaichi suddenly called for early elections. Both Takaichi’s Liberal Democrats and opposition parties promise to increase spending and reduce taxes.
Takaichi’s announcement rattled investors. Bondholders quickly began selling, and bond yields — the interest that governments pay when they borrow money — soared.
The unrest has spread to other financial markets. Japanese investors are historically the largest foreign holders of U.S. Treasury bonds. But higher yields on Japanese bonds could lead them to reduce purchases of American debt to take advantage of higher yields at home.
Last week, the yield on the 10-year US Treasury note reached its highest level since August.
The turmoil raised alarms among some investors. Ken Griffin, CEO of hedge fund giant Citadel, characterized the sell-off as an “explicit warning” to other highly indebted nations such as the United States, noting that not even the world’s largest and strongest economy is immune to the risks.
Confidence in the strength of U.S. credit briefly wavered in April when Trump’s back-and-forth tariff offensive sent U.S. Treasury bond yields suddenly soaring.
US bonds remain a safe haven in a risky world. Still, the president’s erratic handling of economic policy and trade wars are one reason today’s debt is unlike any other episode in American history, said William J. Gale, author of “Fiscal Therapy: Curing America’s Debt Addiction and Investing in the Future.”
The U.S. national debt is now $38 trillion, about 125% the size of the U.S. economy.
Trump has been acting like Max Bialystock in “The Growers,” promising payments to farmers, taxpayers and bondholders with a limited coffers. Analysts expect the midterm elections to prompt the White House to spend even more freely.
This month, Trump promised to further increase military spending to $1.5 trillion in the next fiscal year, which the Committee for a Responsible Federal Budget calculated would add $5.8 trillion to the national debt, including interest, over 10 years.
Net interest payments have tripled over the past five years, reaching nearly $1 trillion. They now consume 15% of U.S. spending, the second largest expense after Social Security.
Gale, who recently co-authored a study on U.S. debt, warned that the prospect of continued debt growth threatens the country’s role as an economic leader and undermines investor confidence in Treasury bonds and the dollar.
This also increases the burden on this generation’s children and grandchildren. As Gale explained, “the more you consume now, the less you can consume later.”
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