Crossborder Capital argued in a recent report that rising debt levels, particularly in advanced economies, were dangerous and required more liquidity. The London-based financial research and investment firm cautioned that the addition of liquidity would likely lead to faster ‘monetary inflation’.

Escalating debt levels

The total amount of world public and private (non-financial sector) debt is projected to increase by $20trn to $25trn in the next three years, testing a new record peak of $350trn by the end of 2025.

This rise would push the world debt-to-gross domestic product ratio to 312% and the ratio for advanced economies to an unprecedented 475%, reverting back to the peak debt ratio of 2020, witnessed during the covid-19 crisis, cautioned the research outfit in its publication titled “Future trends in world debt and global liquidity” issued on Wednesday 8 November.

Debt dynamics

In 1980, the debt-to-GDP ratio for advanced economies was just 213% and only reached 319% by 2000. In contrast, emerging economies had managed to bring their indebtedness down to 161% of their GDP, approximately returning to their year 2000 level, calculated the researchers at Crossborder Capital.

The report highlighted that in advanced economies, debt was rising faster than GDP, while in emerging economies, the uptake of debt was less aggressive and seemed to be stabilising.

Liquidity over solvency

Crossborder Capital emphasized in the report that the key metric to assess safety was not the debt-to-GDP ratio, but the ratio of debt-to-liquidity. Modern financial systems, the company argued, had largely become debt refinancing mechanisms, making liquidity more important than interest rates. Liquidity, as a gross concept, measures the capacity of financial intermediaries’ balance sheets.

Refinancing

The report examined the huge refinancing mechanism of the modern financial system. With an estimated $300trn-plus world debt stock and an average maturity of around 5 years, about $60trn of debt needed to be rolled over each year.

This strained the capacity of financial intermediaries’ balance sheets and demanded more liquidity, reasoned Crossborder Capital. The report also estimated the debt-to-liquidity ratio for the world, as well as for advanced and emerging economies. It noted that while the ratio for emerging economies indicated a declining refinancing risk, the ratio for advanced economies remained stubbornly high, averaging 250% since 1980.

Monetary inflation

Looking towards the future, the report speculated on the rise of ‘monetary inflation’ as a result of increasing debt and liquidity. It highlighted the challenge of deciding whether this would predominantly affect high street or asset market prices.

The report recommended long-term monetary hedges, such as gold and certain crypto assets, against monetary inflation. However, Crossborder Capital acknowledged that gold was not always a perfect hedge against high street inflation.