Let’s consider some staggering information about debt and credit. As of the first quarter of 2024, the world’s debt was $315 trillion, a record high and the result of a combination of borrowing by households, businesses, and governments. This is the largest, fastest, and most widespread increase in debt since World War II. In contrast, global GDP is around 120 trillion. The world’ debt is nearly 3 times what is produced. According to the International Monetary Fund (IMF), two-thirds of the world’s debt comes from mature economies, with the United States and Japan contributing the most. Emerging markets have also seen a surge in debt, with over $105 trillion owed. There is a stark contrast among developing regions. Asia and Oceania hold 27 % of global public debt, followed by Latin America and the Caribbean (5%), and Africa (2%). The burden of this debt varies significantly, with countries’ ability to repay it exacerbated by inequality embedded in the international financial architecture.
The IMF also states that developing countries are now facing a growing and high cost of external debt. Debt service on external public debt reached US$ 365 billion in 2022, equivalent to 6.3% of export revenues. For comparison, the 1953 London Agreement on Germany’s war debt limited the amount of export revenues that could be spent on external debt servicing (public and private) to 5% to avoid undermining the recovery. This dynamic is largely a result of high borrowing costs which increase the resources needed to pay creditors, making it difficult for developing countries to finance investments. Developing regions borrow at rates that are 2 to 4 times higher than those of the United States and 6 to 12 times higher than those of Germany
Business Debt and Household Debt
For businesses, meeting repayments on high levels of debt can mean less money is available to invest in jobs and expansion. Insolvency is also a risk for businesses that are unable to pay back their loans. Businesses are often encouraged to collateralize debt as opposed to capitalization. Which is essentially paying cash. For households, high levels of debt can force them to cut some areas of spending, such as food or fuel. Low-income households are most at risk, the IMF says. If the world’s debt were divided equally among the world’s 8.1 billion people, each person would owe about $39,000. The entire world has developed a culture of debt and credit. We are taught that one of the most important things to do is to make sure you have a good credit rating because you will have to have good credit to get along and survive in life. In many ways we are taught that credit is more important than learning to save and invest our money. And when we do invest we are encouraged to take advantage of the market due to its’ potential with little regard in many cases given to the risk of loss.
Are Debt and Credit Bad?
It often depends on who you talk to doesn’t it? Some people are absolutely adamant against any type of debt or credit. Yet others are very enthusiastic about the leverage it can provide. The truth is, debt and credit are neither bad nor good. They are tools. I have witnessed people using tools that had no idea how to properly use them. The damage that followed was often incredible. Just watch YouTube! Conversely, it has also been incredible to see the impact and good results some have demonstrated in expert use of a tool. As stated, debt and credit are tools but it is imperative to know how to use debt and credit properly. There are many, many tragedies of people who have mishandled debt as opposed to the incredible results of those who properly managed it.
Moving Forward
We will take the next few articles and go into more detail about debt and credit. When to use it. When to avoid it. How to manage it. Learning to budget. Many people would love to give more to missions but cannot because of debt. We will explore ways to manage it moving forward to allow us to contribute more to getting the Gospel to the world.
Read our other Art Of Giving articles here.
Register for upcoming financial webinars!
