Source: Zhou Ziheng

The looming debt crisis has been slowly fermenting for a long time, and it has been brewing for more than ten years. The global debt crisis is showing a broad and sustained growth trend. Global debt has surged by about 50% over the past decade, exceeding 46% of global gross domestic product (GDP). Among them, the sovereign debt crisis is severe, and the impact of the US debt crisis on the world is particularly significant.

Global Debt Crisis and U.S. Debt Concerns

Data from the International Finance Association (IIF) shows that from the end of 2015 to the end of 2024, global debt grew by 49.2%, from US$213.3 trillion to US$318.4 trillion, with a net increase of US$105 trillion. According to the International Monetary Fund (IMF), global GDP has grown by about $35 trillion in the past 10 years to $110 trillion. This means that the global debt has now tripled the world's GDP.

During the same period, the debt of the household sector increased by 50%, to US$60.1 trillion; the debt of non-financial enterprises increased by 45%, to US$91.3 trillion; the debt of financial enterprises increased by the smallest, at 33.4%, to US$71.4 trillion. Meanwhile, debt soared 67.7%, from $56.8 trillion at the end of 2015 to $95.3 trillion at the end of 2024.

As of the end of 2024, debt in mature markets soared 34.3%, to US$214.3 trillion; debt in emerging markets soared 92.7%, to US$103.7 trillion. In terms of GDP, developed economies grew by 41.7%, and emerging markets and developing economies grew by 53.2%.

In the context of the global debt crisis, the debt levels of developed economies have also climbed to decades of historical highs. The U.S. debt situation is particularly eye-catching, and it is often approaching the statutory debt ceiling. The UK has become the heaviest debt burden among developed economies, and Japan's debt situation has become its economic chronic disease.

Specifically, as of the end of 2024, the total U.S. debt was US$97.83 trillion, an increase of 62.5% over the past decade, bearing about one-third of the world's debt. During the same period, the United States, the world's largest economy, grew by 58.4%, a growth rate lower than the debt growth rate. Currently, about 30% of U.S. Treasury bonds are held by foreigners or investors. This proportion may decline as more and more capital markets are built and investment is being made.

In terms of the eurozone, total debt increased by 22% to $54.5 trillion by the end of 2024. The eurozone economy grew by 38.5% over the past decade, faster than debt growth. UK debt has increased by 12.5% ​​over the past decade, while its GDP has increased by 22.5%. As of the end of 2024, Russia's total debt reached US$2.6 trillion, an increase of 67.7%, and the Russian economy grew by 60.3%. During the same period, the total debt increased by 123.4%, reaching$62.4 trillion, while GDP growth rate was 64.5% over the same period, about half of the debt growth rate.

On the other hand, about 60% of low-income and about 25% of emerging markets are in debt difficulties or at high risk. Developers 70% - 85% of debts exist in foreign currencies, and most of them are US dollar debt. Due to interest rates and exchange rate factors, the debt situation further deteriorated. Some developers are on the verge of default and are in a comprehensive financial crisis.

The global debt crisis has been around for a long time, and two emergencies have become important driving factors:

The measures taken to alleviate the serious impact of the new crown epidemic on the economy in the past decade have far-reaching impacts. The International Monetary Fund said that global GDP shrank by about 2.5% year-on-year in 2020, but global debt increased by 13% during the same period to US$291.2 trillion. According to the International Finance Association data, since the World Health Organization declared a global pandemic in January 2020, global debt has increased by 23.2%, from $258.4 trillion to $318.4 trillion. According to data from the International Monetary Fund, global GDP grew by about 26% during the same period.

The epidemic has fundamentally worsened the debt situation, with two main reasons: First, the lower interest rates are not used to reduce debt and reorganize public finances. Instead, many have taken advantage of favorable financing conditions to bear more debt, especially during the pandemic, which has surged. Many debt ratios even exceeded the level during the 2008 financial tsunami. For example, the U.S. 10-year Treasury bond interest rate fell below 1% during the epidemic, and since then, interest rates have risen sharply, sometimes even reaching 5%. Second, since the outbreak of the Russian-Ukrainian war, the debt repayment security costs in emerging markets have reached the highest level since the outbreak of the new crown epidemic. Geo-conflicts undoubtedly resulted in a significant increase in defense spending, exacerbating the new international debt crisis. In July 2022, Fitch Credit Rating Agency said that the number of debt defaults in the financial markets reached 17, emphasizing that this is a record number. With the continued Russian-Ukrainian war and the United States turning, Europe strengthens its military equipment and its debt growth pressure will become increasingly significant.

Many of them have been hit by the debt crisis, which makes the trade surplus with the United States particularly important. The problem is that the U.S. debt expansion and its push to widen deficit have come to an end.

The expansion of US bonds and the trade deficit have widened, and now it is facing a reversal.

It is worth noting that while global debt is growing rapidly, world trade volume has also increased significantly. World trade has doubled from about $16 trillion to about $33 trillion over the past decade.

As the world's largest trade deficit, the United States also has the world's largest fiscal deficit. The United States issued huge sovereign debts with a total scale of US$35 trillion, and also promoted the extremely astonishing monetary expansion in global monetary history, and once implemented unlimited quantitative easing without any scruples. The United States is undoubtedly the most powerful in the dual expansion of global debt and trade.engine.

In the case of the United States, there seems to be some correlation between the trade deficit and the fiscal deficit. The U.S. economic growth relies on consumption to drive, and the residents' savings rate is extremely low, but the debt ratio continues to rise. An important role of the federal debt expansion is to convert some potential residents' liabilities into liabilities, thereby driving consumption and promoting the economy. But the problem is that this operation leads to generally negative savings rates in sectors and household sectors, and the economic accumulation rate turns into debt accumulation rates.

The excessive debt of the US economy has provided a strong boost to trade expansion, but this is like a stacked man, and there is ultimately a risk of collapse. The problem now is that both trade and debt face the challenge of austerity.

The OECD pointed out in the 2024 Global Debt Report that 40% of global public debt will expire within the next three years and need to be refinancing. In recent years, U.S. bond holders have continuously adjusted their bond maturity structure and replaced long-term bonds with short-term bonds. This has caused the pressure on the maturity structure of US Treasury bonds, which have already inverted interest rates, to increase sharply. When bonds mature, they must be refinancing at higher interest rates, and long-term bond issuance faces greater market pressure. The question is: How long will financial market participants be willing to finance the high debt of the United States?

Although the US Treasury rating has been downgraded during the Biden period, the market still has some confidence in US Treasury. However, the rating reflects relative rather than absolute probability, and it is difficult to determine whether market confidence can withstand the second downgrade of US bond ratings. There may be multiple equilibriums in the financial market, and confidence is affected by the mainstream narrative of the market. Generally speaking, early indicators of the U.S. debt crisis may not have a significant impact, but if the U.S. falls into serious fiscal difficulties, financial market sentiment may change rapidly. It should be pointed out that the potential default of the United States is not an isolated incident and will have a huge impact on the international financial market, and others will be involved in a vicious cycle.

In January this year, the U.S. commodity trade deficit widened to a record level. According to data released by the U.S. Department of Commerce, the commodity trade deficit expanded to 25.6%, reaching US$153.3 billion. The market believes that the expected increase in the White House has stimulated a surge in imports. Economists say that strong US dollar and high consumption rates have led to low import prices, and the status of the US dollar's international reserve currency has also contributed to the widening of the deficit.

The White House’s hidden concerns in response to recession

Financial priority and even overwhelming everything, which is the major policy of Trump’s executive team. If the US fiscal can withstand the current debt crisis and no longer amplify the fiscal deficit and trade deficit, the US debt situation will turn danger into safety, the US dollar circulation can be stabilized, the market of US dollar assets will not collapse greatly, the US economy will escape stagflation, and the overall economic situation will improve.

This may explain why the White House is using Thunderbolt to reduce fiscal spending and is willing to use reciprocal tariffs to comprehensively challenge the existing global trade order. Both American allies and competitors are facing strong measures from the White House. The White House’s tough economic logic is: either countries follow the United States to make painful economic adjustments, or fall into it before being dragged down by the US crisis and recession.Dilemma.

It is not difficult to understand why the White House has accepted crypto assets and incorporated them into its strategic reserves, and has tried its best to promote peace in Ukraine, and has strongly demanded that allies increase their defense spending. The purpose of accepting crypto assets is to absorb hot dollar money and avoid impacting the fragile dollar asset system; mediate the conflict between Russia and Ukraine and promote peace, aiming to coordinate global energy supply, stabilize price trends, and curb inflation. As for the measures in major industries such as steel, chips, shipping, petrochemical and energy, they are to prevent industrial capital outflows and prevent the further deterioration of the US trade, debt and monetary situation. The White House attacked everywhere, the signal was chaotic and changeable, and even the orders changed every day. Among these so-called Trump uncertainties, there are several clear points, namely: reducing the US fiscal deficit and trade deficit, stabilizing and even calming global commodity prices, and weak US dollar absorbing investment in the United States to promote manufacturing.

Although the White House is keen on the strategy of a weak dollar, increasing tariffs will inevitably tighten trade, increasing revenue and reducing expenditure will inevitably tighten fiscal policy, which has triggered market doubts about the so-called "Trump recession".

It is worth noting that when US stocks fell by more than 10%, the Federal Reserve made it clear that the number of interest rate cuts will not decrease during the year, but Powell directly admitted that there will be no progress in inflation this year. The quantitative tightening of Treasury bonds has been reduced from US$25 billion per month to 5 billion, and the pace of controlling inflation has been delayed, and the concept of "temporary inflation" has been picked up by the Federal Reserve. According to the Fed's forecast, inflation caused by tariffs is considered temporary. Although economic growth will decline, the unemployment rate is expected to rise significantly. In short, the Fed's direction is shifting to curbing a recession in the US economy, or to fully support the US dollar strategy.

No matter what, the debt crisis is alarming, the tariff trade war has begun, and the risk of stagflation has emerged. At this time when there is no advance, there will be a retreat, the White House has launched a full-scale reciprocal tariff, which is a gamble that collided with the global economic system.