The Effect of Debt on the Global Economy

The national debt is a measurement of how much the federal government owes creditors, most commonly depicted as a percentage of gross domestic product (GDP). A high debt-to-GDP ratio is considered viable when the economy is expanding because that growth allows the government to generate higher tax revenues to help pay down the debt. However, it’s not good when the economy is in decline, which is the current status not only in the U.S. but in many countries throughout the world as of late 2020, early 2021.1 

For context, the stimulus efforts and tax cuts that allowed the U.S. to emerge from the Great Recession significantly increased the national public debt. In 2010, the debt ratio was 52% of GDP, but by the end of 2019, it had risen to 79%, the largest increase in any decade since the post-WWII 1940s.2 But now, according to the Congressional Budget Office, the U.S. debt ratio is estimated to reach 98% by the end of 2020.3

At a 2020 Bloomberg New Economy Forum, there were calls for more government stimulus  support to boost consumer spending and keep the economy running, and not just in the U.S. Christine Lagarde, the president of the European Central Bank, warned that stimulus needs to continue playing a role until the virus is contained. Like many countries across the globe, Southeast Asia took a hit during the second quarter, rebounded in the third and has braced for increased outbreaks occurring in the final quarter of 2020.4

Wall Street analysts warn that it won’t take much for the U.S., Europe and Japan economies to contract again in the first two quarters of 2021, despite the bounceback last summer.5 Overall, economists expect the global economy to shrink by 5% in 2020, in part due to the 20% reduction in world trade.6

One idea to help rebuild economies is to retrain workers who have lost jobs during the pandemic in fields such as cybersecurity, software programming and other technology positions.7

Public Debt vs Personal Debt

Speaking of debt, how has your household fared in the wake of this year’s economic decline? Has your debt-to-income ratio increased substantially, or do you have it under control with plenty of income to cover your expenses? It can be a challenge to balance your need to pay off debt with your need to invest for the future. It’s a good idea to maintain a balance so you can continue reducing debt while saving for the long-term. It’s also important to regularly evaluate your financial strategy to ensure it reflects your current goals and objectives, so please keep us in mind any time you’re considering making changes to your strategy. 

1 John Letzing. World Economic Forum. Nov. 5, 2020. “Countries are piling on record amounts of debt amid COVID-19. Here’s what that means.” Accessed Nov. 24, 2020.

2 Peter G. Peterson Foundation. Dec. 19, 2019. “Nine trillion added to the national debt over the last decade.” Accessed Nov. 24, 2020.

3 Investopedia. Sept. 23, 2020. “The National Debt Explained.”  Accessed Nov. 24, 2020.

4 Bloomberg. Nov. 23, 2020. “World Leaders Urge Pressing the Pedal on Stimulus.” Accessed Nov. 24, 2020.

5 Enda Curran and Jeff Black. BloombergQuint. Nov. 17, 2020. “World Economy Teeters Near New Slump, Defying Vaccine Optimism.” Accessed Nov. 24, 2020.

6 Dr. Dan Steinbock. The Street. Nov. 23, 2020. “World’s Largest Free-Trade Pact Inspiration for Global Recovery.” Accessed Nov. 24, 2020.

7 Rory Heilakka. World Economic Forum. Nov. 24, 2020. “How upskilling could help cities rebuild after Coronavirus.” Accessed Nov. 24, 2020.

Neither our firm nor its agents or representatives may give tax or legal advice. Be sure to speak with a qualified professional about your unique situation.

We are an independent firm helping individuals create retirement strategies using a variety of insurance and investment products to custom suit their needs and objectives. This material is intended to provide general information to help you understand basic financial planning strategies and should not be construed as financial or investment advice. All investments are subject to risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values.

The information contained in this material is believed to be reliable, but accuracy and completeness cannot be guaranteed; it is not intended to be used as the sole basis for financial decisions. If you are unable to access any of the news articles and sources through the links provided in this text, please contact us to request a copy of the desired reference.

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