Nowadays,
when macroeconomists talk about global debt hitting a “ceiling,” the immediate
instinct of the investment class—and anyone else who peruses Financial Times
and Barron’s—is to brace for a replay of 2008. Years of coverage in the
mainstream financial papers have conditioned us to picture underwater suburban
mortgages, maxed-out credit cards, and over-leveraged consumers triggering a
massive, cascading recession.
But
that is not the crisis we are staring down today. In fact, if you look at the
underlying data, the global household debt-to-GDP ratio is hovering around a
decade low.
The global working and middle classes, while certainly squeezed by relentless
inflation and stagnant wages, aren’t driving this systemic vulnerability; they
slowed their borrowing. No, the true danger—the $106 trillion currently
teetering over the abyss—sits squarely on the balance sheets of sovereign governments and heavily leveraged corporations
in the finance, energy, and defense sectors.
This
is what makes our current moment so terrifying to macroeconomists. In 2008,
when the private financial sector collapsed under the weight of its own
misdeeds, the state stepped in to absorb the shock. Sovereigns bailed out the banks, socializing their private losses
to keep the system afloat. But today, the sovereigns are the source of toxic
debt. They are the overleveraged ones, frantically issuing paper to cover
exploding deficits. When a sovereign balance sheet fractures under the strain
of an acute energy shock, no larger entity is left in the room to bail them
out. The shock absorbers are gone.
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