Global Debt Spike Has Some Central Bankers Worried

As the U.S.-China trade war continues and economies take a dive, already low global interest rates could drop even further, The Wall Street Journal reported on Sunday (Sept. 8).

The Institute of International Finance (IIF) noted that worldwide total debt is $246.6 trillion, up nearly 50 percent.

Although the borrowing helped the recession, the large debt prevents regulators from increasing interest rates.

“Globally, you are at worryingly high levels,” said Sonja Gibbs, managing director for global policy initiatives at the IIF. “There’s going to be an impact on the broader economy.”

U.S. consumers are less affected than the U.K., Canada and Australia due to a better debt-to-income ratio.

“The world is in a delicate equilibrium,” said Mark Carney, governor of the Bank of England, in a February speech. “The sustainability of debt burdens depends on interest rates remaining low and global trade remaining open.” Raising rates further during the economically strong years would have provided more opportunity to cut them when economies slowed, he noted, but the higher rates had a bigger adverse impact than many anticipated.

“Tightening may have had more of a restraining effect than anticipated,” said Nathan Sheets, chief economist at PGIM Fixed Income and a former senior economist at the Federal Reserve. “It acts as a very powerful drag on spending.”

In an effort to stimulate the economy, the Danish Jyske Bank is bringing to market what is being billed as the first negative interest rate mortgage – and the implications are widespread for the (global) economy. The interest rate on the 10-year mortgage equates to negative 50 basis points per year.

Negative interest rates, as defined in simple terms, mean borrowers get paid to take loans and when they do pay them back, the creditor – in this case, the bank – gets back less than the amount that was lent out in the first place.


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