For decades crushing debt has spread misery in the world’s poor and lower-income nations. But the menace of unsupportable borrowing that now hangs over the global economy emanates from some of the richest countries.
Record or near-record debt in the United States, Britain, France, Italy and Japan threaten to hamstring growth and sow financial instability around the globe.
At home, it means countries must make interest payments with money that otherwise could have paid for health care, roads, public housing, technological advances or education.
The hunger for more and more loans has also pushed up borrowing costs, gobbling up a bigger share of taxpayer money. It can also push up rates on business, consumer and car loans, as well as mortgages and credit cards; and drive up inflation.
And perhaps most worrisome, overhanging debt — pumped up even when an economy is relatively sound and jobless rates are low, like the United States — gives governments less room to respond when things sour.
“You want to be able to spend big and spend fast when you need to,” said Kenneth Rogoff, a Harvard economics professor.
What happens if there’s a financial crisis, a pandemic or a war? What if there’s a sudden need for more social services spending and jobless relief because of changes caused by artificial intelligence or climate-related disasters?
Borrowing a lot of money quickly becomes more difficult — and expensive — when the national debt is already sky-high.
At the World Economic Forum in Davos last week, President Trump commanded center stage, but on the sidelines, finance ministers fretted over their ability to fund a growing list of must-haves, from beefed-up militaries to upgraded electricity grids.
Government borrowing when an economy is strong, and when interest rates are low, can support growth, and in times of distress can help bolster spending. The cycle of supercharged borrowing began with the 2008 financial crisis and recession, when governments rushed to provide assistance to struggling households and tax revenues fell. Relief programs during the Covid-19 pandemic, as economies shut down and health care costs rocketed, kicked debt levels up another notch as interest rates were rising and outpacing growth.
But debt levels did not decline. And now, in six of the wealthy Group of 7 nations, the national debt equals or exceeds the country’s annual economic output, according to the International Monetary Fund.
More and more countries are being squeezed by demographics and slow growth. In Europe, Britain and Japan, aging populations have driven up the government’s health care and pension costs at the same time that the number of workers who provide the necessary tax revenue has shrunk.
The need to rebuild infrastructure and invest in advanced technology in many regions is also dire. A yearlong study requested by the European Union’s executive arm concluded that the 27-member bloc needed to spend an additional $900 billion on things like artificial intelligence, a shared energy grid, supercomputing and advanced worker training to effectively compete.
In Britain, it will cost at least 300 billion pounds ($410 billion) to upgrade infrastructure over the next decade, according to Future Governance Forum, a think tank in London. Billions more will be needed to revitalize its limping National Health Service.
Efforts to trim public spending in Italy, where debt equals 138 percent of gross domestic product, by cutting health care, education and public services, or in France by raising the retirement age, have set off vehement protests.
France, which has been politically deadlocked over the budget for months, saw its sovereign debt rating downgraded last fall, raising questions about the country’s financial stability.
Meanwhile, the world has turned more dangerous. Tensions between China and the United States have sharpened. Europe is threatened by an increasingly aggressive Russia and a belligerent American president.
Most countries have responded by significantly supporting Ukraine with billions of dollars and increasing military spending. Members of the North Atlantic alliance agreed to eventually devote 5 percent of their gross domestic product to defense. Japan is also substantially enlarging its military budget.
Tokyo’s debt is already staggering. It amounts to more than twice the country’s annual economic output.
The prospect of an even deeper hole grew last week when Prime Minister Sanae Takaichi suddenly called for a snap election. Both Ms. Takaichi’s Liberal Democrats and opposition parties are promising to increase spending and lower taxes.
Ms. Takaichi, for instance, has proposed suspending the consumption tax on food and nonalcoholic beverages, a move the Finance Ministry estimates would cost more than $30 billion annually.
For decades, Tokyo managed to fund its spending through rock-bottom interest rates that minimized borrowing costs. The Bank of Japan began to reverse its longstanding policy of ultralow interest rates in 2024.
It is moving slowly because of fears of financial instability, Mr. Rogoff of Harvard said. Japan has “stuffed debt into every orifice of the financial sector — pension funds, insurance companies, banks. And there are inflation pressures.”
The combination of low interest rates and elevated inflation particularly hurts working- and middle-income families, who see the value of their savings erode.
Ms. Takaichi’s announcement rattled investors. Bondholders quickly began selling and bond yields — interest that governments pay when they borrow money — jumped.
The uneasiness bled into other financial markets. Japanese investors are historically the largest foreign holders of U.S. Treasuries. But higher returns from Japanese bonds could cause them to cut back on their purchase of American debt in order to take advantage of bigger yields at home.
Last week, the yield on the 10-year U.S. Treasury note rose to its highest level since August.
The turbulence set off alarms among some investors. Ken Griffin, chief executive of the hedge fund giant Citadel, characterized the sell-off as an “explicit warning” to other heavily indebted nations like the United States, noting that not even the world’s strongest and largest economy is immune to the risks.
Faith in U.S. creditworthiness briefly shuddered last April, when Mr. Trump’s blitz of tariff flip-flops caused Treasury yields to suddenly surge.
American bonds remain a safe haven in a risky world. Still, the president’s erratic economic policymaking and trade wars are one reason the current debt is unlike any other episode in American history, said William J. Gale, the author of “Fiscal Therapy: Curing America’s Debt Addiction and Investing in the Future.”
The U.S. national debt is now $38 trillion, roughly 125 percent the size of the American economy.
Mr. Trump has been acting like Max Bialystock in “The Producers,” promising payouts to farmers, taxpayers and bondholders with a limited pot of money. Analysts expect that the midterm elections will prompt the White House to spend even more freely in the coming year.
This month, Mr. Trump vowed to further increase military spending to $1.5 trillion dollars over the next fiscal year, which the Committee for a Responsible Federal Budget calculated would add $5.8 trillion to the national debt, including interest, over 10 years.
Net interest payments have tripled over the past five years, reaching roughly $1 trillion. They now eat up 15 percent of U.S. spending, the second biggest expense after Social Security.
Mr. Gale, who recently coauthored a study on the U.S. debt, warned that the continuing prospect of growing debt threatens the country’s role as an economic leader and undermines investor confidence in Treasury bonds and the dollar.
It also increases the burden on this generation’s children and grandchildren. As Mr. Gale explained, “the more you consume now, the less you can consume later.”
River Akira Davis contributed reporting.
Patricia Cohen writes about global economics for The Times and is based in London.
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