The Debt of the World Rose to 100 Trillion Dollars

When the International Monetary Fund (IMF) advises countries to spend and borrow more, it is willing to do so. However, if there is a recommendation to start repaying debts and prepare for financial shocks, the organization becomes “malicious” for countries, writes economist, fund manager and author of several books Daniel Lacalle on the Mises Institute portal.

“Our forecast points to a relentless combination of low economic growth and a high debt burden, the future will be difficult,”

said the International Monetary Fund (IMF) in a report published last month. They stressed that governments must work to reduce debt and build buffers for the next shock.

“This shock is definitely coming, and maybe sooner than we think,“

the report said.

This advice comes with a caveat. At the current rate, the U.S. national debt-to-GDP ratio will rise to 198 percent by 2050. And that doesn’t take into account recessions. The public debt burden of the G7 countries will rise to 188 percent at the current rate, while the global level will rise to 122 percent.

Only one country is reducing its national debt

The IMF expects Germany to reduce its debt from 63.5 percent to 42 percent. In the case of Japan, however, the national debt is expected to grow to an incredible 329 percent by the middle of the century. According to the IMF, the debt level of the countries of the world will rise to 100 trillion dollars for the first time this year, this growth is mainly driven by the USA and China.

Recommendations are Followed Only in Certain Cases

IMF recommendations are rarely followed by countries in the long term. They are followed only if they recommend that governments increase their spending. However, when we talk about saving and cutting costs, governments begin to perceive the IMF as a malevolent organisation.

The messages sent out by the IMF in 2020 make them accountable for the current fiscal crisis in the financial market. Let’s see what they wrote in the 2020 annual report.

“Governments around the world have introduced extensive fiscal and financial measures to help people and businesses. At the same time, such an increase in the role of the government creates opportunities for corruption, as previous crises have shown. This means that governments must control and supervise extraordinary fiscal and financial measures. The IMF’s recommendation is to spend as much as is necessary, but keep the receipts,”

the IMF wrote.

What part of the IMF’s recommendations were adopted by countries around the world?

You guessed it right, the “spend as much as necessary” part. And they continue to do so. For many governments, new spending has become normal, and in some cases the extraordinary fiscal measures of 2020 have even been extended. With this, they have expanded their role in the economy and increased budget deficits during economic growth.

One of the biggest contributors to the debt burden is the United States

The IMF predicts that the U.S. national debt-to-GDP ratio will rise by 3 percentage points annually over the next five years. It is important to note that the IMF is not expecting a crisis or recession, so this is happening in an environment of economic growth and job creation.

Governments do not adopt any of these recommendations. As I mentioned earlier, governments only listen to the IMF when it recommends increased spending. If they recommend reducing the debt, the organisation will be blamed.

The Risk of Financial Shocks is Increasing

No government meddling in the economy will cut spending, especially when the central bank is cutting interest rates. In Europe, it is made worse by the fact that past statistics of economic growth in the Eurozone have been revised upwards. Politicians now use this statistical editing to justify even more spending, borrowing and tax increases.

In his blog post, “How high economic uncertainty can threaten global financial stability,” that the risk of financial shocks is increasing, and not dealing with debt seriously threatens economic growth. As usual, the tone of the article is very diplomatic and assumes that governments will be fiscally prudent and build buffers for the financial crisis.

Unfortunately, the authors of the IMF are too optimistic

The pandemic paved the way for new records to be set in the championship of fiscal irresponsibility. Every government believes it will solve problems by taxing the wealthy or corporations more. This is the oldest and most ridiculous excuse for fiscal policy.

If you believe that wealthy, large corporations will pay $100 trillion in additional taxes over the next ten years, you have a problem with math and history.

The idea of ​​central banks loosening monetary policy when things go sour is very similar to what governments do. Central banks make it possible to get rid of the constraints of fiscal policy. At the same time, it is not seen that the governments understand how such a monetary policy wreaks havoc among the middle class.

Key Takeaways

A $100 trillion fiscal time bomb means lower economic growth, lower real wages, financial repression and the destruction of purchasing power of currencies in the future. Governments don’t care about the IMF because they use the next shock to further inflate the size of government relative to the economy.