A mosaic collection of world currencies.
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The world is looking at a debt crisis that will span the next 10 years and it’s not going to end well, economist Arthur Laffer has warned, with global borrowings hitting a record of $307.4 trillion last September.
Both high-income countries as well as emerging markets have seen a substantial rise in their debt piles, which has grown by a $100 trillion from a decade ago, fueled in part by a high interest rate environment.
“I predict that the next 10 years will be the Decade of Debt. Debt globally is coming to a head. It will not end well,” Laffer, who is President at investment and wealth advisory Laffer Tengler Investments, told CNBC.
As a share of the global gross domestic product, debt has risen to 336%. This compares to an average debt-to-GDP ratio of 110% in 2012 for advanced economies, and 35% for emerging economies. It was 334% in the fourth quarter of 2022, according to the most recent global debt monitor report by the Institute of International Finance.
To meet debt payments, it is estimated that around 100 countries will have to cut spending on critical social infrastructure including health, education and social protection.
Countries that manage to improve their fiscal situation could benefit by attracting labor, capital and investment from abroad, while those that do not could lose talent, revenue — and more, Laffer said.
“I would expect that some of the bigger countries that don’t address their debt issues will die a slow fiscal death,” Laffer said, adding that some emerging economies “could quite conceivably go bankrupt.”
Mature markets such as the U.S., U.K., Japan and France were responsible for over 80% of the debt build-up in the first half of last year. While in the case of emerging markets, China, India and Brazil saw the most pronounced increases.
The economist warned that repaying the debt will become more of an issue as population in the developed countries continues to age and workers become more scarce.
“There are two main ways to cover this issue: raise taxes or grow your economy faster than debt is piling up,” he said.
Laffer’s comments come on the heels of the U.S. Federal Reserve’s decision to leave rates unchanged in January, and shooting down hopes of a rate cut in March.
