Updated quarterly, our evolving views on the thematics shaping the markets around us


WHY IT MATTERS | Many governments around the world run budget deficits, meaning their costs (spending) are higher than revenues (taxes). Debt is how the deficit gap is filled. Government spending is crucial to the economy (accounts for greater than 30% of GDP for the majority of developed nations), meaning without an increase in debt to finance government spending (especially after the ongoing pandemic stimulus programs), we’d unlikely see meaningful economic growth in the short-term.

THE TAKEAWAY | Global public debt-to-GDP increased from 83% in 2019 to a record high of 100% in 2020 in response to the economic impact of the pandemic. The world is flooded with debt and we’re currently locked in a self-perpetuating cycle of issuing new debt to pay down outstanding debt, finance deficits, and make interest payments, with no end in sight. Economic theory tells us that excessive debt is the bogeyman that haunts the economic prosperity of future generations, so we’ll continue to see an increased focus on the impacts that current debt levels may have on future generations.



  • Most governments around the world came into the pandemic running budget deficits. This meant that, should an economic shock occur, they would be forced to issue more debt as they did not have a buffer of savings to use to stimulate the economy. Which is exactly what played out.

  • Though government debt-to-GDP globally increased in 2020, we would expect this to flatten out in the coming years as the economy picks back up (assuming it does).

  • The only two major economies in which government debt-to-GDP will likely continue to increase is the US and China.

  • In the US, new debt will need to be issued just to repay the interest of previously issued debt given that government tax revenue is more than offset by entitlement and discretionary spending.

  • Globally, the cost of debt will likely continue to stay cheap (c. $15 trillion worth of bonds currently have negative yields) as governments focus on securing funding for stimulus and other deficit-driven policy programs.

  • Debt is likely to continue to be less and less economically productive, forcing governments to raise more debt to generate the same level of GDP.



Economic Growth | Fiscal balances should work counter-cyclically to economic growth. This means that, when the economy is growing, the budget should be positive (no need to issue debt as governments run a profitable budget) and the overall level of debt should be coming down (use the surplus to pay down debt or save); when the economy is contracting, governments should run budget deficits (and issue debt should their savings not be enough for a sufficiently large fiscal stimulus package). Whilst we’ve definitely not managed debt levels this way in the last decade (we’ve mainly run budget deficits despite weak but generalized economic growth), economic growth should still be a relevant leading indicator of where debt levels and debt ratios are likely to be in the future.

Monetary and Fiscal Stimulus | There are no free lunches, and the more we stimulate the economy and financial markets in the short-term, the more we increase the overall level of indebtedness, and the higher the economic cost to future generations.

Political Agendas | Sound academic thinking would tell us that increasing debt levels, beyond a certain point (believed to be 90% debt-to-GDP), tend to be detrimental to the stability of an economy. That being said, in a world where pretty much every major economy has debt levels above that threshold, one starts to wonder if academic thinking matters anymore. Politicians and economists have two options: continue to increase debt levels and avoid economic pain in the short term, or implement measures aimed at reducing leverage (i.e., austerity, inflation, etc.), which is likely to lead us into a possible (and maybe necessary) economic depression. Political agendas would seemingly prefer the former to the latter.

Defaults | Whilst sovereign defaults tend to be a reality for countries where we burn our vacation hours (Argentina or Greece), the current increase in debt levels is increasing the risks of defaults across the world. Whilst countries that have monetary sovereignty cannot default on their debt if it’s denominated in local currency, many Emerging Market countries own dollar-denominated debt which makes them more vulnerable to debt defaults.

Capital Allocation | More important than the overall level of indebtedness is the decision of how to invest the money raised through new issuances. Raising debt to pay down debt harms economic growth. Instead, countries should focus on using “debt-money” on projects that are likely to generate returns that justify the issuance of debt, the same way corporates should issue debt to invest in cash flow positive projects (instead of buying back their own stock).

Inflation | One of the fastest ways to reduce debt levels is through currency debasement (i.e. inflation). It takes five years of 10% annual inflation to cut debt levels in half. The downside? In those five years, savings will also halve.