Is the world really drowning in debt?

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Photo by Adobe stockGross global debt reached US$365 trillion, or 311 per cent of global GDP, in the first half of 2026, according to the latest from the Institute for International Finance (IIF). Should we be worried? The IIF thinks so, pointing out that “Mature market governments now spend more on interest expense than the world invests in either AI, defence, or energy” and “Debt has become more a political issue than a macro-financial one — creating a vicious cycle between elections and short-term quick fixes, and a long-term vulnerability as the marginal utility of higher debt diminishes.” What is still more striking, is that the IIF worries more about high-income than developing or emerging economies.THIS CONTENT IS RESERVED FOR SUBSCRIBERS ONLYSubscribe now to read the latest news in your city and across Canada.Exclusive articles from Barbara Shecter, Joe O'Connor, Gabriel Friedman, and others.Daily content from Financial Times, the world's leading global business publication.Unlimited online access to read articles from Financial Post, National Post and 15 news sites across Canada with one account.National Post ePaper, an electronic replica of the print edition to view on any device, share and comment on.Daily puzzles, including the New York Times Crossword.SUBSCRIBE TO UNLOCK MORE ARTICLESSubscribe now to read the latest news in your city and across Canada.Exclusive articles from Barbara Shecter, Joe O'Connor, Gabriel Friedman and others.Daily content from Financial Times, the world's leading global business publication.Unlimited online access to read articles from Financial Post, National Post and 15 news sites across Canada with one account.National Post ePaper, an electronic replica of the print edition to view on any device, share and comment on.Daily puzzles, including the New York Times Crossword.REGISTER / SIGN IN TO UNLOCK MORE ARTICLESCreate an account or sign in to continue with your reading experience.Access articles from across Canada with one account.Share your thoughts and join the conversation in the comments.Enjoy additional articles per month.Get email updates from your favourite authors.THIS ARTICLE IS FREE TO READ REGISTER TO UNLOCK.Create an account or sign in to continue with your reading experience.Access articles from across Canada with one accountShare your thoughts and join the conversation in the commentsEnjoy additional articles per monthGet email updates from your favourite authorsSign In or Create an AccountThis advertisement has not loaded yet, but your article continues below.Yet the IIF also shows that between 2018 and June 2026, the rise in the ratio of global debt to output was less than 10 percentage points. That hardly sounds so bad. The story is striking: the ratio reached a post-COVID peak of 337 per cent in early 2021, before falling by 27 percentage points by the end of 2023. What was this magical “debt-buster”? Good old-fashioned (and supposedly “unexpected”) inflation. This is — to put it mildly — not the first time inflation has wiped out debt. It was, to take one of countless examples, an important part of the United Kingdom’s elimination of its post-Second-World-War debt. For countries able to print the money in which their debt is denominated, that is often what happens.Get the latest headlines, breaking news and columns.By signing up you consent to receive the above newsletter from Postmedia Network Inc.A welcome email is on its way. If you don't see it, please check your junk folder.The next issue of Top Stories will soon be in your inbox.We encountered an issue signing you up. Please try againYet inflation leaves a legacy. It is one of the reasons interest rates are now much higher than pre-COVID. Interest costs have soared for governments in mature economies: between December 2021 and the end of August 2026, these jumped by 1.5 percentage points, to reach 3.3 per cent of GDP. The United States is a good example: as a share of GDP, interest costs rose 1.6 percentage points between January 2021 and 2026.This advertisement has not loaded yet, but your article continues below.What is happening with the level and costs of government borrowing is central — but it is not everything. The IIF also notes the huge recent rise in issuance of AI-linked corporate bonds. It estimates that this will reach US$541 billion in 2026, up from US$90 billion three years before. The associated investment boom is also a driver of the higher interest rates and so an indirect cause of the higher cost of government debt.Remarkably, AI-related corporate debt is issued at far longer maturities than U.S. Treasuries: in 2026 so far, the average maturity of the former reached 13.4 years (from 11.5 years in 2024) against a mere 2.5 years for U.S. Treasuries (down from 6.1 years in 2024). Interest on corporate AI-related debt is also only a percentage point higher than on Treasuries. While U.S. government borrowing is strikingly short term, other high-income governments are not far behind.The IIF indeed seems more relaxed about private than government debt and that of emerging economies than of high-income ones. It notes, for example, that private credit, about which there is some concern, “accounts for only around five per cent of outstanding non-financial corporate debt”. On the latter, it points to the record pace of sovereign Eurobond issuance in 2026, adding that “stronger fundamentals have helped.” It also stresses the health of “ESG lending,” with year-to-date lending of US$1 trillion.In sum, the IIF’s view is that the recent inflation-induced fall in debt ratios has created a “deceptively benign picture.” With structurally higher interest rates than a few years ago and governments without the will or the mandate to impose pain on voters, public debt will continue to accumulate in supposedly mature countries at a rapid rate. Meanwhile, the shift to shorter maturities, notably in the U.S., flatters to deceive. The risk is that there could be a sharp jump in these yields, with dramatic results for the cost of debt service. A possible trigger might be sharp depreciation of a vulnerable currency.This advertisement has not loaded yet.This advertisement has not loaded yet, but your article continues below.There are also political risks. War is one. Energy shocks are another. Bigger trade conflicts are yet another. It is also not hard to imagine outright internal conflict in the U.S. or a breakdown of co-operation in the European Union. If the far right were to become a dominant political force, the implicit support of, say, France by Germany, might even be in question.My take from the IIF’s report is not that we are on the eve of disaster but that important countries are losing room for manoeuvre on an unsustainable long-run path. As the late economist Herbert Stein famously said, “If something cannot go on forever, it will stop.”Huge accumulations of public debt cannot be justified forever, particularly when there is no crisis to justify them. But there is also a corollary to Stein’s law by the late economist Rüdiger Dornbusch, who said that: “crises take longer to arrive than you can possibly imagine, but when they do come, they happen faster than you can possibly imagine.” His expertise was Latin America. Many must have noticed the growing similarity between that region and the U.S.This advertisement has not loaded yet, but your article continues below.In emerging countries that rely on borrowing in foreign currencies, the crises Dornbusch had in mind tend to require a foreign rescue. That is not the case for countries able to borrow in their own currencies. The latter can also play all sorts of games with their lenders, be they domestic or foreign. One is “financial repression” in which lenders are forced to accept lower interest rates or, in other ways, lend to governments on unfavourable terms. The U.S. is powerful enough (the U.K. most definitely is not) even to coerce foreign lenders. But such tricks never work forever.Dornbusch’s law still applies: it can merely take a long time to get there. Maybe even the free capital flows we are so used to will be sacrificed. But inflation is almost always the first resort. Why else does Trump want the Fed to put rates at one per cent?© 2026 The Financial Times LtdThis advertisement has not loaded yet.Notice for the Postmedia NetworkThis website uses cookies to personalize your content (including ads), and allows us to analyze our traffic. Read more about cookies here. By continuing to use our site, you agree to our Terms of Use and Privacy Policy.