Since the end of the Great Recession, global household debt to GDP has increased dramatically with Switzerland leading the charge at 128.8%, followed by Australia at 121.3% household debt to GDP. The US is ranked at #11 with 77.3% household debt to GDP. According to Mehmet Caner’s Partners in Debt, household debt boosts GDP for only one year, moreover, for every 1% increase of household debt to GDP, it results in a 0.1% decrease in GDP growth in the long run. Once private debt (household debt) to GDP moves pass 60%, consumption decreases dramatically; at 80% private debt to GDP, the negative effect that private debt has on growth increases dramatically. However, lowering debt levels may not increase growth if wages are stagnant.

Effe cts of Governm ent Debt

The increase of government debt also has adverse long-term effects on the economy as borrowing increases. Once public debt to GDP reaches the tipping point, over 77%, it will result in long-term GDP decline; this number varies for each country, for China and Guatemala, the tipping point is 64%. Once public debt to GDP reaches the 90% mark, any increase of government debt will have a negative impact on GDP growth. This is because as government debt increases, interest payments for the debt increases, which leads to less public investment in infrastructure, education, healthcare, etc. In the United States, interest payments for the federal debt will become the 3rd largest expenditure for the US government by 2048, resulting in less money for defense and infrastructure and higher taxes.

Government debt also has an adverse effect on corporate debt as well. Increases in government debt encourages companies to hold onto cash and other liquid assets due to increased borrowing costs resulting in the supply of safer debt instruments, as a result, companies will have to pay a higher interest rate to attract investors. They are also less likely to invest because borrowing costs driven up by government bonds. According to Wharton Business School, increases in government debt will decrease corporate debt by a third, in the long run; however, this is not the case now, because of low interest rates. Finally, lenders are also affected by the ebb and flow of government debt as well; for every one percent bank, pension funds, and insurance companies loan the government, corporate lending by these groups drops by 4-12 basis points, resulting in less economic growth and fewer jobs.



Debt Interaction Equation