Global debt has been touching new highs in this decade as compared to the world war II period. The global debt has been recorded as $303 trillion in 2021. 

The debt that governments, businesses, and households of the world take are known as global debt. 

Governments tend to pick up debt for financing government deficits or particular expenditures. 

The more the government debt, the higher the public debt of that nation. Governments certainly also use debt to pay old debts. 

Businesses take loans to sufficiently keep capital in check for production and other activities. 

Households take loans for several reasons like private consumption, and capital investment. 

These all together build a huge amount of debt on the shoulders of the world. Today the world debt is 256% of the world GDP. 

This means that the liability is far far more than the income we earn today globally. 

This also means that for every dollar of income we have to take a loan of $2.56. That means if the global economy’s income or say production rises, it is majorly financed by the debt. 

This is a very severe implication of debt. The bubble of world debt is getting heavier. 

The countries with the highest global debt levels compared to GDP were Japan (257%), Sudan (210%), Greece (207%), Eritrea (175%), and Cape Verde (161%).

Cause and effect  of world debt 

World debt is increasingly high even before the pandemic. 2020 saw the highest surge in global debt in the past 50 years.  

The most concerning fact is that public debt has crossed the mark of 40% of total global debt, the highest since the 1960s. 

The primary cause of increasing world debt is the need for expansion of GDPs where money already available is less than what is required to invest. 

However ruthless spending for expansion on the brick of debt is highly unsustainable since, for every new income, the country has a liability of interest and debt. 

The reason discussed above was more of a generalized perspective. The global debt reached its highest point due to the very specific reason for the global pandemic. 

The situation during the pandemic was a disastrous one for all economies. The lockdowns curbed production and incomes. 

Households had no income and massive expenditures. Governments worldwide needed money to spend on health and relief.

 The nations also took expansionary policies to work over demand. This all headed to high inflation, low global demand, and a very very high level of debt. This debt is now becoming heavier day by day. 

The rich and developing nation divide is also a major consequence of debt. Developing nations rely on debt-driven growth more.

But as global debt rises global inflation also rises. This negatively impacts the developing economies as debt becomes costly and therefore growth becomes costly. 

The nations whose debt to GDP ratios are higher and are developing, most of them today are heading towards a debt crisis.

A debt crisis is a situation where economies default on external or internal debt. The bubble of debt-driven growth falls out. 

This leads to a global crisis where inflation, debt defaults, and unemployment, are high with low living standards and growth. 

Whereas in rich economies, debt is less prevalent at the public level but it has an adverse effect on inflation positions. 

As the world gets too close to a bubble burst it does not matter whose nation is the most defaulted or has the most peculiar cause of world debt, it will affect everybody. 

The default in world debt will surely lead to negative or by far lowest interest rates and this might again go beyond just a direct impact. The whole of these circumstances will lead to global demand, supply, currency, and every other economic factor getting imbalanced.

Other than the pandemic, geopolitical disturbances and war-like situations all over the world have been great factors in debt. 

War in Russia and Ukraine, disturbances near Taiwan and china, and china and India have led to great damage.

The damage is not just bound to the affected countries but the whole world. 

The oil price is, of course, the sole indicator of how troubled the world economy is at the highest possible. 

Supply and demand shocks lead to oil price hikes during pandemics and war-like situations. 

This in turn places a high inflation factor in economies all over the world. Already debt-driven countries now have high fiscal deficits and of course, households also need money to revive their financial position. 

Here when they add more debt to finance their extra spending due to inflation. This increase in global debt by an enormous amount indicates a future debt crisis predicted to be very devastating.   

IMF says that “To meet debt payments, at least 100 countries will have to reduce spending on health, education and social protection”. 

A recent example of such a debt crisis can be located in Sri Lanka. Sri Lanka become bankrupt due to its excessive debt, inflation, low GDP, food shortage, and political turmoil this year. 

The country nearly defaulted on loan payments for about USD 51 billion. As a result of such a debt crisis, inflation rose to 54.6%. 

It is very clear that such a disastrous economic situation cannot be tackled in the short run and needs pure economic restructuring or policy shocks to cure it in long run. 

Collective approach 

To prevent the debt bubble to pop and creating disaster in the economic landscape of the world it is very much needed that the debt ratios are bought down.

Bringing down the debt ratio means producing on capital accumulation and not just with debt resources. 

Building sustained GDP is only possible when debt is reduced and self-reliance is induced in the world economy. 

Collective protective measures can help in driving economic growth for each other and thus currency values can be stabilized.

Rich economies and poor ones can collaborate on rules and regulations for interest rates on external debt. 

The public debt of poor or developing nations should be monitored regularly and stabilization measures are to be taken by respective governments. 

It is very important to spot defaulting economies at an early stage and help them revive before the default. 

The high level of population is also one such factor that leads to pressure on public expenditure and thus deficits. 

Such issues are not solved in days or months but yes if taken proper measures, do provide significant results in the future. 

Moreover, the loan dispersal system and mechanism have to be robust but also efficient when a default is forthcoming.