The $100 Trillion Global Debt Bomb And Financial Shock Risk

IMF's Warning on Global Debt

The International Monetary Fund (IMF) recently stated that the world is facing a challenging future due to a combination of low growth and high debt. The organization emphasized that governments must work to reduce debt and rebuild buffers for the next financial shock, which may come sooner than expected.

However, this warning comes with a concerning prediction. If current spending rates continue, the US debt to GDP ratio could reach 198% by 2050, even without a recession. The G-7 public debt to GDP is expected to soar to 188%, and the global figure could rise to 122%. The IMF expects only Germany to reduce its debt, from 63.5% to 42%. In contrast, Japan's public debt could reach a staggering 329%. According to the IMF's Fiscal Monitor, public debt levels could reach $100 trillion in 2024, driven by China and the US.

Government Response to IMF's Advice

Unfortunately, governments rarely heed the IMF's advice. They tend to listen when the advice encourages more spending, but when it comes to saving and cutting expenditures, governments often view the IMF as a harmful entity.

The IMF's messages in 2020 may have contributed to this fiscal crisis. In its Annual Report 2020, titled "A Year Like No Other," the IMF advised governments to spend as much as necessary but to keep track of expenses. Governments around the world adopted the "spend whatever it takes" part of the advice and have continued to increase spending, even during periods of economic growth.

The Rising US Debt

One of the fastest-growing debt burdens is in the United States. Over the next five years, the IMF predicts an annual increase in public debt to GDP of nearly three percentage points. This prediction does not account for a potential crisis or recession, implying that this increase will occur in a growth and job-creation environment.

However, governments are likely to ignore these recommendations. As previously mentioned, governments tend to listen to the IMF when it recommends increasing public expenditures and blame the organization when it comes to reducing debt.

The Risk of a Financial Shock

The IMF has warned that the risks of a financial shock are increasing as complacency about debt meets the risk of a significant slump in economic growth. The organization optimistically assumes that governments will be fiscally prudent and build cushions to avoid a financial shock. However, the pandemic has led to record global fiscal irresponsibility, with governments believing they can solve their problems by increasing taxes on the wealthy and large corporations.

If you believe that the wealthy and large corporations are going to pay $100 trillion in higher additional taxes in the next ten years, you might need to reassess your understanding of mathematics and history.

Many governments are under the impression that central banks will implement aggressive easing measures when things turn sour. However, they seem indifferent to the damage this policy is causing to the middle class.

Bottom Line

The $100 trillion fiscal timebomb could result in lower growth, lower real wages, financial repression, and the destruction of currencies' purchasing power in the future. Governments are likely to ignore the IMF's warnings and use the next shock to further increase the size of government in the economy under the guise of another "emergency."

What are your thoughts on this matter? Do you believe governments will heed the IMF's warnings, or will they continue on their current path? Share this article with your friends and discuss. Remember, you can sign up for the Daily Briefing, which is delivered every day at 6pm.