The hidden danger of US economic recession amid the global debt crisis

Source: Zhou Ziheng

The imminent debt crisis has been slowly brewing for more than a decade. The global debt crisis is showing signs of widespread and sustained growth. Global debt has surged by about 50% over the past decade, outpacing global gross domestic product (GDP) by 46%. Among them, the sovereign debt crisis is severe, and the impact of the US debt crisis on the world is particularly significant.

Global Debt Crisis and US Debt Concerns

Data from the Institute of International Finance (IIF) show that from the end of 2015 to the end of 2024, global debt increased by 49.2%, from US$213.3 trillion to US$318.4 trillion, a net increase of US$105 trillion. According to the International Monetary Fund (IMF), global GDP has increased by approximately $35 trillion over the past 10 years to $110 trillion. This means that global debt is now three times the size of world GDP.

During the same period, household debt increased by 50% to US$60.1 trillion; non-financial corporate debt increased by 45% to US$91.3 trillion; financial corporate debt increased the least, at 33.4% to US$71.4 trillion. Meanwhile, government debt soared 67.7%, from $56.8 trillion at the end of 2015 to $95.3 trillion at the end of 2024.

By the end of 2024, mature market debt soared 34.3% to $214.3 trillion; emerging market debt soared 92.7% to $103.7 trillion. In terms of GDP, developed economies grew by 41.7% and emerging market and developing economies grew by 53.2%.

Against the backdrop of the global debt crisis, the debt levels of developed economies have also climbed to historical highs in decades. The U.S. debt situation is particularly eye-catching, repeatedly approaching the statutory debt ceiling. The UK has become the most debt-ridden developed economy, while Japan's debt situation has become a chronic economic disease.

Specifically, as of the end of 2024, the total US debt will be 97.83 trillion US dollars, an increase of 62.5% over the past decade, accounting for about one-third of the world's debt. During the same period, the United States, the world's largest economy, grew by 58.4%, a growth rate lower than the growth rate of debt. Currently, about 30% of U.S. Treasury bonds are held by foreign governments or investors. This share is likely to decline as more countries build their own capital markets and invest domestically.

For the euro area, total debt increases by 22% to $54.5 trillion by the end of 2024. The eurozone economy grew by 38.5% over the decade, faster than its debt. Over the past decade, UK debt has increased by 12.5%, while its GDP has grown by 22.5%. As of the end of 2024, Russia's total debt reached 2.6 trillion US dollars, an increase of 67.7%, and Russia's economy grew by 60.3%. During the same period, China's total debt increased by 123.4% to US$62.4 trillion, while the GDP growth rate was 64.5%, about half the debt growth rate.

On the other hand, about 60% of low-income countries and about 25% of emerging markets are in debt distress or at high risk. 70% - 85% of developing countries' debt is in foreign currency, most of which is US dollar debt. Affected by interest rate and exchange rate factors, the debt situation has further deteriorated. Some developing countries are on the verge of default and are caught in a full-scale financial crisis.

The global debt crisis is a long one, with two unexpected events serving as important drivers:

The measures taken over the past decade to mitigate the severe economic impact of the COVID-19 pandemic have had far-reaching consequences. The International Monetary Fund said that global GDP contracted by about 2.5% year-on-year in 2020, but global debt increased by 13% to US$291.2 trillion during the same period. Data from the Institute of International Finance shows that since the World Health Organization declared a global pandemic in January 2020, global debt has increased by 23.2%, from US$258.4 trillion to US$318.4 trillion. Data from the International Monetary Fund shows that global GDP grew by about 26% during the same period.

The pandemic has fundamentally worsened the debt situation for two main reasons: First, lower interest rates have not been used to reduce debt and restructure public finances. Instead, many countries took advantage of favorable financing conditions to take on more debt, with debt surging especially during the pandemic. The debt ratios of many countries even exceed the levels during the 2008 financial tsunami. For example, the U.S. 10-year Treasury bond rate fell below 1% during the epidemic, and then rose sharply, sometimes even reaching 5%. Second, since the outbreak of the Russo-Ukrainian war, the cost of debt repayment guarantees in emerging markets has reached the highest level since the outbreak of the COVID-19 pandemic. Geopolitical conflicts have undoubtedly led to a significant increase in defense spending, exacerbating the new international debt crisis. In July 2022, Fitch credit rating agency stated that judging from the bond yields of various countries in the financial markets, the number of countries that have defaulted on their debts has reached 17, emphasizing that this is a record number. As the Russia-Ukraine war continues and U.S. policy shifts, Europe will strengthen its military and the pressure on its government debt growth will become increasingly significant.

Many countries have fallen into the challenge of debt crisis one after another, which makes the trade surplus with the United States particularly important. The problem is that the United States' debt expansion and its drive to widen the deficit have also come to an end.

The expansion of U.S. debt and the widening of trade deficit are now facing a reversal 

It is worth noting that while global debt has grown rapidly, world trade volume has also increased significantly. Over the past decade, world trade has doubled from about $16 trillion to about $33 trillion.

As the country with the largest trade deficit in the world, the United States also has the largest fiscal deficit in the world. The United States has issued a massive amount of sovereign debt, with a total size of $35 trillion, and has also promoted an extremely astonishing monetary expansion in the history of global currency, and once implemented unlimited quantitative easing without scruples. The United States is undoubtedly the most powerful engine in the dual expansion of global debt and trade.

As far as the United States is concerned, there seems to be some correlation between the trade deficit and the fiscal deficit. The U.S. economic growth relies on consumption, the residents' savings rate is extremely low, and the debt ratio continues to rise. An important function of the federal government's expansion of debt is to convert part of the potential household debt into government debt, thereby stimulating consumption and boosting the economy. But the problem is that this operation leads to generally negative savings rates in the government and household sectors, and the economic accumulation rate is transformed into a debt accumulation rate.

The over-indebted US economy has provided a strong boost to trade expansion. However, this is like stacking mountains, and there is a risk of collapse. The problem now is that both trade and debt are facing tightening challenges.

The OECD pointed out in its "Global Debt Report 2024" that 40% of the world's public debt will mature in the next three years and will require refinancing. In recent years, U.S. debt holders have continuously adjusted the maturity structure of their debt holdings, replacing long-term bonds with short-term bonds. This has led to a sharp increase in the pressure on the maturity structure of U.S. Treasury bonds, which have already experienced an inverted interest rate. Government bonds must be refinanced at higher interest rates when they mature, and the issuance of long-term bonds faces greater market pressure. The question is: How long will financial market participants be willing to finance high levels of U.S. debt?

Although the U.S. debt rating has been downgraded during the Biden administration, the market still has a certain degree of confidence in U.S. debt. However, ratings reflect relative rather than absolute probabilities, and it is difficult to determine whether market confidence can withstand another downgrade of US debt ratings. There may be multiple equilibria in financial markets, and confidence is influenced by the mainstream narrative of the market. Generally speaking, early indicators of a U.S. debt crisis may not have a significant impact, but if the U.S. were to fall into serious fiscal trouble, financial market sentiment could shift quickly. It should be pointed out that the potential default of the United States is not an isolated incident. It will have a huge impact on the international financial market and other countries will be drawn into a vicious cycle.

In January this year, the U.S. merchandise trade deficit expanded to a record level. According to data released by the U.S. Department of Commerce, the merchandise trade deficit expanded by 25.6% to US$153.3 billion. The market believes that the White House's expectation of additional tariffs has stimulated a surge in imports. Economists say that a strong dollar and high consumption rates have led to low import prices, and the dollar's status as an international reserve currency has also contributed to the widening of the deficit.

The White House responds to recession concerns

Fiscal priority, even overriding everything, is the major policy of the Trump administration. If the US Treasury can withstand the current debt crisis without increasing the fiscal deficit and trade deficit, the US debt situation will turn around, the circulation of the US dollar will be stabilized, the market price of US dollar assets will not collapse significantly, the US economy will escape stagflation, and the overall economic situation will improve.

This may explain why the White House is taking drastic measures to cut fiscal spending and is not hesitating to challenge the existing global trade order with reciprocal tariffs. Both America’s allies and competitors are facing strong measures from the White House. The White House’s tough economic logic is: either countries follow the United States in making painful economic policy adjustments, or they get into trouble before being dragged down by the US crisis and recession.

It is not difficult to understand why the White House has accepted crypto assets and included them in its strategic reserves, and why it has tried its best to promote peace in Ukraine and strongly urged its allies to increase defense spending. The purpose of accepting crypto assets is to absorb hot money in US dollars and prevent it from impacting the fragile US dollar asset system; to mediate the Russia-Ukraine conflict and promote peace, aiming to coordinate global energy supply, stabilize price trends and curb inflation. As for policy measures in major industries such as steel, chips, shipping, petrochemical energy, etc., they are aimed at preventing the outflow of industrial capital and preventing further deterioration of the US trade, debt and currency situation. The White House is attacking from all sides, and its policy signals are confusing and changeable, even changing from day to day. Among these so-called uncertainties of Trump's policies, there are a few relatively clear ones, namely: reducing the US fiscal deficit and trade deficit, stabilizing or even stabilizing global commodity prices, and using a weak dollar to attract investment in the US to promote manufacturing.

Although the White House is keen on the strategy of a weak dollar, increasing tariffs will inevitably tighten trade, and increasing revenue and reducing expenditure will inevitably tighten fiscal policy, which has triggered market concerns about the so-called "Trump recession."

It is worth noting that, with the U.S. stock market falling by more than 10%, the Federal Reserve made it clear that the number of interest rate cuts this year will not decrease, but Powell directly admitted that there will be no progress in reducing inflation this year, and the quantitative tightening of Treasury bonds will be reduced from US$25 billion per month to US$5 billion. The pace of controlling inflation has been delayed, and the concept of "

No matter what, the debt crisis alarm bells are ringing, the tariff trade war has already begun, and the risk of stagflation has already emerged. At this time when we must move forward or we will fall behind, the White House’s introduction of comprehensive reciprocal tariffs is a gamble that will collide with the global economic system.