Mosaic collection of world currencies.
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Economist Arthur Laffer Jr. warned that the world is facing a debt crisis that will extend over the next ten years, and that it will not end well, as global borrowings reached a record level of $307.4 trillion last September.
Both high-income countries and emerging markets have seen their debt piles rise, which has grown by $100 trillion over the past decade, fueled in part by the high interest rate environment.
“I predict the next 10 years will be the decade of debt,” Laffer, who is president of investment and wealth advisory firm Laffer Tengler Investments, told CNBC. “Global debt is peaking. It's not going to end well.”
As a share of global GDP, debt rose to 336%. This compares to an average debt-to-GDP ratio of 110% in 2012 in advanced economies, and 35% in emerging economies. It reached 334% in the fourth quarter of 2022, according to the latest Global Debt Monitor report issued by the Institute of International Finance.
To make debt payments, it is estimated that around 100 countries will have to cut spending on critical social infrastructure, including health, education and social protection.
Countries that manage to improve their financial standing can benefit by attracting labor, capital and investment from abroad, while countries that don't can lose talent, revenue — and more, Laffer said.
“I expect that some major countries that do not address their debt issues will slowly die financially,” Lafer said, adding that some emerging economies “could go bankrupt.”
Mature markets such as the US, UK, Japan and France were responsible for more than 80% of debt accumulation in the first half of last year. While in the case of emerging markets, China, India and Brazil saw the most pronounced increases
The economist warned that debt repayment will become a bigger problem as populations in developed countries continue to age and workers become scarce.
“There are two main ways to cover this issue: raise taxes or grow your economy faster than you can accumulate debt,” he said.
Lafer's comments follow the US Federal Reserve's decision to leave interest rates unchanged in January, dashing hopes of a rate cut in March.
