Record debt, rocketing rates and unknown fragilities
Debt has accumulated at a rate exceeding GDP growth for much of the last decade. When this happens, it can be a warning sign of financial crises to come. As the U.S. Federal Reserve has ratcheted up rates at the fastest pace in 40 years to quell inflation, the dangers of a crack-up in financial markets have risen. But it’s in the nature of financial crises that it's hard to anticipate where they will emerge in advance.
Total global debt reached a record high of $306 trillion in the first quarter of 2022, led by a surge in several emerging markets, as well as China and the United States, according to the Institute for International Finance. By the third quarter, it had dropped to $290 trillion but this remains a very high level. When debt reaches extreme levels, vulnerability to financial crises rises.
2022’s record global debt
Trillion
Source: Institute of International Finance
Chief Investment Officer, PGIM Wadhwani
Dr. Sushil Wadhwani
History is littered with examples of rate hiking cycles where central banks keep going in their desire to bring inflation down. But they're very conscious of these unknown unknowns, which seem to pop up with alarming regularity. Think about the central banks that were tightening in ’07/’08 [before the Global Financial Crisis] and how surprised they were then by what popped up.”
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