Global debt hit a record high of $233 trillion (£169 trillion) in the third quarter of 2017, according to the Institute of International Finance (IIF).
This represents a $16 trillion increase in debt levels at the end of 2016 and more than three times the size of the global economy.
Who has all this debt? To whom is it due? What does this level of indebtedness mean? And how much should we worry about it?
Who has this debt?
According to the IIF, $68 trillion, most of it, belongs to non-financial corporations.
The other biggest borrowers are governments around the world, which have $63 trillion in debt. Financial institutions have $58 trillion in borrowings.
Finally, there are households, with a total debt of $44 trillion.
And to whom is this money owed?
“We” is the short answer. Each financial liability, which includes debt, has a corresponding financial asset. And all those financial assets ultimately belong to someone.
If you put your money in a bank account, the bank is likely to lend the money to someone else to buy a house: your financial asset then becomes someone else’s financial liability.
Debt is a form of wealth.
So it doesn’t matter that global debt is growing, because that also means global wealth is growing?
Until a certain point.
The economic function of debt is to allow economic actors to spend more today than their income would otherwise allow.
Households and companies borrow to finance their consumption or their investments. This can be a good idea if their income is temporarily limited and spending more today will increase their well-being.
If the borrowed money is used to increase the future productive capacity of this economic agent – for example by spending it on education or increasing the capacity of a business – going into debt can also be a very wise decision.
Some of the world’s major religions denounce the lending of money, but, from an economic point of view, debt is not an inherent evil.
The problem arises when the debt incurred is excessive and the scheduled interest or repayments potentially cannot be repaid, risking bankruptcy for the borrower and sudden loss of wealth for the lender.
It’s also a problem when money generated from debt is invested recklessly.
What about governments?
This is a special case because governments, in general, can raise funds through taxation and thus effectively control their own revenues. They also often borrow money in a currency that they print themselves, which means that in extremis they can make sure the lenders are repaid by printing money.
The fact that governments also do not have a fixed lifespan, unlike individuals, means that they can usually roll over their debts indefinitely.
All of this allows many governments to borrow on considerably easier terms than households and most businesses.
Governments, it is true, can always overborrow and run into a funding crisis. This is often seen with states in the developing world run by chaotic and corrupt administrations.
We also saw this with Greece in 2010. But it is important to note that Greece was unusual among high-income countries in that it did not borrow in a currency (the euro) that it printed itself.
Governments also have a role to play in macroeconomic stabilization in times of recession. When governments fail to increase their borrowing and spending to support aggregate demand, it can be a harmful false economy for the government itself and also for the economy at large.
Government under-borrowing can be as serious a problem as over-borrowing.
Is global debt then excessive today?
Some support it. A group of economists in 2014 warned that increasing global debt (or “leverage”) was risky and could hamper international recovery.
The IIF warns that if interest rates rise around the world, it could make many debt burdens harder to pay off.
Former Financial Services Authority Chairman Adair Turner wrote a powerful book in 2015, highlighting the apparent reliance of many economies on ever-growing piles of debt, generated by unstable financial systems, to spur decent growth in the GDP.
There is a strong argument that giant banks in developed countries are still funding their balance sheets with too much debt, rather than equity, running the risk of a repeat of the 2008 global financial crisis.
However, the IIF also points out that, despite reaching a new high in nominal terms, the share of global debt in global GDP has declined for four consecutive quarters.
Indeed, global GDP has recovered quite vigorously. The fact that income is now growing faster than debt should make it easier to service borrowing costs, even if interest rates rise.
So nothing to worry about then?
It may be imprudent to draw conclusions from overall global debt figures, and more useful to focus on particular pockets of debt around the world.
Many economists are particularly concerned about the situation in China, where corporate bank borrowing has soared since the global financial crisis. Many suspect that much of this borrowing by Chinese companies has been wasted, risking a destabilizing financial crisis or long-term sclerosis for the world’s second-largest economy.
The Bank of England also maintains a close eyes over credit card debt and car loans in the UK, lest many families leave themselves vulnerable if there is another downturn.
Most economists also agree that it is undesirable for national tax systems to effectively favor corporate debt financing over equity financing (shares and direct investor equity) by making the former tax deductible. .