Global and US Debt, between risks and winning models

The International Monetary Fund (IMF) estimates global public debt at $100 trillion. One of the most indebted nations is the United States of America (USA). Giovanni Barone Adesi, a professor emeritus at the Faculty of Economics at Università della Svizzera italiana (USI), discussed the issue and its risks in an interview with Corriere del Ticino.

The world is currently dealing with a significant amount of debt. Public debt, which refers to the debt of states, is projected to exceed 100 trillion dollars by the end of the year. The International Monetary Fund (IMF) has suggested that the situation may be even more concerning than it appears, expressing a sense of alarm.

The most astonishing fact, however, is that the total debt of the United States of America, including private debt, alone amounts to this enormous figure. The question, therefore, arises as to whether current and future income generation will be able to sustain such debt. "If current economic policies persist in the US, the national debt will become unsustainable, leading to a breaking point," says Giovanni Barone Adesi, Professor Emeritus of Financial Theory at USI. When and if this breaking point will be reached is impossible to know, as "it is a situation that we have never experienced in such a globalised economy".

"In the case of the US, some expansionary economic policies have not helped. The latest stimulus package launched by the Biden administration to boost post-pandemic consumption has been economically ineffective and has worsened the budget deficit. Even advisors close to President Biden have publicly voiced their opposition to it. Additionally, the recent decision to send another costly anti-missile system to Israel, which already has a strong ballistic missile defence, has raised questions," comments Professor Baron Adesi.

Excess debt (public and private) has consequences when it is not sustainable. But what repercussions are we talking about? Can this, for example, lead to a financial crisis? "Yes, if it is poorly managed. In any budget, you have to set priorities that you may or may not agree with, but there is still room to carry on with scenarios that seem almost surreal. One example is Japan's notoriously huge debt (over $9 trillion). However, Japan has never had any difficulty financing this debt," says Giovanni Barone Adesi. Indeed, Japan's investors (private and institutional)have consistently purchased government bonds. Similarly, Japan is the primary purchaser of US Treasury bonds, currently holding 14% of the total. If Japan were to alter its stance on US bonds, it could potentially lead to a critical turning point. "We recently came close when the Bank of Japan decided to abandon the negative interest rate regime. Japanese savers and investors started to move away from US assets, prompting the Japanese bank to reverse its decision to avoid destabilising the US financial system, which would have had a significant impact on the Japanese," explains USI Professor Emeritus.

Finally, a note on private debt, which is equally important as there is a reasonably close link between the two types of debt. "Think of the subprime crisis that erupted fifteen years ago, which originated in the private sector and which showed how mismanagement of private debt can impact banks. This led to the need for state intervention to prevent insolvency," Giovanni Barone Adesi concludes.

The complete interview, edited by Dimitri Loringett and published in the pages of Corriere del Ticino, is available at the following link.