The world economy has experienced a long debt cycle under the fiat, dollar-centric monetary system in place since 1971. The process of debt accumulation was slowed by the Great Financial Crisis of 2007–2008 but then resumed its upward path, propped up by deflationary forces, Federal Reserve intervention, and financial repression policies. However, recent market trends point to limits to further debt accumulation.
Since President Nixon severed the link between the U.S. dollar and gold in August 1971, the dollar has depreciated by 98% relative to gold and by 87% in purchasing power. Nevertheless, beginning in the late 1970s with the Volcker Fed, a new phase of monetary stability was achieved, and the “great financialization” of the neoliberal revolution began, fueled by a multi-decade-long decline in interest rates.
The chart below, from the IMF’s Global Debt Monitor, shows the evolution of world debt levels in the post–World War II period. From 1950 to 1980, the world debt-to-GDP ratio increased at a tepid pace—from 97% to 108%. From 1980 to 2000, during the heyday of dollar hegemony and monetary stability, global debt ratios soared, reaching 195%. Since 2000, debt levels have continued to rise, though at a slower and more uneven pace, reaching 250% of GDP in 2020.
The Bank for International Settlements (BIS) provides another, more granular, source for global and country debt levels. The BIS’s total world sample for 2001–2024 is shown below. World debt-to-GDP levels peaked near 300% in 2020 and stood at 250% in September 2024.
The chart below shows the persistent rise in the U.S. debt-to-GDP ratio from 1980 to 2011, broken down by government, households, and corporations. Total U.S. debt-to-GDP rose from 130% in 1980 to 255%, while the government’s share increased from 32% to 103%.
Following the GFC, U.S. debt levels stabilized at around 250% of GDP, as private debt from households and corporations was offset by rising government debt. This was a long period marked by deflationary tendencies: first, declining oil and commodity prices; second, a strong dollar; third, an influx of cheap immigrant labor; and last but not least, a flood of imports from Asia, primarily China. This deflationary environment, enhanced by financial repression (negative real interest rates, yield curve control and quantitative easing), facilitated large fiscal deficits. Over the 12-year period from 2011 to August 2023, real annualized rates on 2-year Treasury bonds were low to negative, averaging –1.4%. During the four years of the Biden administration, annual fiscal deficits averaged over 8% of GDP, enabled by persistently negative real rates, which reached as low as –6% in 2022.
As the chart below shows, the world has changed since 2022, when 10-year Treasury yields rose from 1.5% to over 4%. Since August 2023, interest rates have again turned positive on 2-year Treasuries. With the “free lunch” of financial repression over, the rising cost of financing the debt has raised alarms in Washington and financial markets over the sustainability of fiscal deficits. Interest payments on the national debt increased by $251 billion in 2024 to $1.12 trillion—well above defense spending—and are expected to rise further as debt is refinanced at higher rates. Both Fed Chair Jerome Powell and the Congressional Budget Office (CBO) have warned that the U.S. is on an “unsustainable fiscal path.”
The dilemma faced by the United States is shared by several other countries that also benefited from financial repression in recent years but must now adapt to higher interest rates.
For example, the UK successfully reduced its government debt-to-GDP ratio from 140% to 89% between 2021 and 2024. However, its 10-year Treasury borrowing rate has now risen to 4.5%, compared to near zero in 2020.
Japan, the champion of financial repression, has seen its 10-year Treasury yield rise from –0.5% to +1.5% since 2020, increasing the cost of financing its enormous government debt.
Brazil is another country facing a significant challenge. It enjoyed a period of negative real interest rates in 2020–2022, which helped reduce debt ratios. However, real rates near 10% have returned with a vengeance, and debt is rising again. Fiscal deficits are expected to remain very high in the coming years (in the order of 7–8%, according to IMF forecasts), while GDP growth remains low. Brazil is experiencing “fiscal dominance,” a condition in which monetary policy is constrained by the growing weight of interest expenses on fiscal expenditures. The last time Brazil experienced a surge in debt levels (1998–2002), it was able to reduce them thanks to a fortuitous economic shock brought about by the China-fueled super-commodity cycle (2002–2012). The chart below shows how the combination of strong economic growth, capital inflows, and currency appreciation reduced debt levels during this period. Unfortunately, a repeat of these circumstances is unlikely. It is far more probable that Brazil will have to resort to yield curve control measures and higher inflation to bring debt levels under control.
Turkey is a recent example of a country that has successfully deleveraged through financial repression. The latest IMF Staff Report on Turkey outlines the measures adopted: monetary expansion to inflate prices; suppression of government bond yields to artificially low levels; interest rate caps on loans; mandated holdings of government bonds at below-market rates; limits on offshore swaps; and export surrender requirements (i.e., capital flow management measures). The result of these anti-market policies of financial repression has been a significant reduction in debt ratios, creating the conditions for an eventual new credit cycle.
China stands out for its continued rapid debt accumulation in recent years. While much of the world successfully implemented financial repression policies during the pandemic years, China faced a deflationary environment caused by a collapse in real estate prices and an oversupply of manufactured goods. According to the BIS, the total debt-to-GDP ratio is approaching 300%—a figure that would be considerably higher if Chinese GDP were measured in line with Western standards. China appears to be following the path of Japan—growing government debt and exports to compensate for weak domestic demand—a model that will likely cause rising trade tensions.
The chart below shows BIS debt data on most of the world’s prominent economies.
Countries highlighted in red are those that have accumulated debt quickly to excessive levels, either at the government level or across the entire non-bank sector (government, households, and corporations) and are expected to see further increases in debt-to-GDP ratios over the next five years (according to IMF estimates).
Countries in black may have experienced rapid debt accumulation but still have the capacity to increase debt and are not expected to run large fiscal deficits in the future.
Countries in green have accumulated debt at a moderate pace and still have room to increase debt ratios.
The first two columns show the increase in debt ratios over the past ten years; the next two columns show debt ratio levels as of Q3 2024; and the final column shows IMF estimates of the annual increase in government debt ratios over the next five years.
China, Brazil, Japan, France, and the United States are the countries with the most concerning public sector debt dynamics and are, therefore, the most likely to engage in financial repression.
Mexico, Indonesia, Germany, Poland, and Turkey have sound debt dynamics and are less likely to resort to financial repression.
The United States and the United Kingdom have both successfully used financial repression to stabilize debt ratios. However, they still have high debt levels that are expected to increase in the coming years. As the chart from Lynn Alden (https://www.lynalden.com/) shows, the United States has largely repeated the path it followed between 1920 and 1950. That period was followed by a long phase of high growth and low deficits, which significantly lowered debt ratios. Today, optimists foresee a tech-driven productivity boom that could lead to a similar outcome over the next decade. Pessimists, however, point to poor demographics, disappointing productivity trends over the past twenty years, and rising obligations for defense, healthcare, and social security, all of which suggest a much bleaker outlook.