Charles Hanover Explores the Global Shift in Debt Economics
Recently, the U.S. stock market has faced a period of unease, primarily due to reduced expectations of Federal Reserve interest rate cuts. However, despite interest rates being at a 40-year high, the U.S. economy continues to grow robustly. This contradicts traditional economic theories and has led to a reevaluation of the role of interest rates.
Charles Hanover points out that the belief in interest rates as the primary driver of economic cycles may be flawed. He argues that over the past few decades, the global debt level has expanded significantly, and the international financial system has transformed into one designed to support "debt refinancing." Developed countries, through central bank liquidity injections, have created an excess of liquidity to lower debt costs, while exporting cheap liquidity to other countries, thereby increasing global debt levels. This behavior has brought the world closer to the risk of a debt crisis.
A New Perspective: Liquidity Drives the Cycle
Global debt has reached a massive $350 trillion, with annual refinancing needs ranging from $500 billion to $600 billion. When the demand for debt rollovers mismatches available liquidity, refinancing crises emerge. Recent crises like the Asian Financial Crisis, the Global Financial Crisis, and the UK bond crisis all fall under this category. Therefore, the focus should shift from interest rates to liquidity, as liquidity is now the key factor driving today's financial cycles.
The U.S. Economy's Unique Position: The Debt Refinancing Engine
The U.S. economy's continued strong growth in a high-interest-rate environment cannot be explained by traditional economic theories. According to a senior financial market expert, this is due to the U.S.'s vast refinancing system, which aims to refinance debt to sustain economic growth, rather than raising new capital. Higher bond yields can even create higher returns, translating into increased consumption. However, the rising global debt levels and the mismatch between rollover demands and liquidity will pose significant risks to future financial markets. In a financial system dominated by debt refinancing, the economy's sensitivity to interest rates has decreased, and focusing on liquidity rather than rates is crucial to understanding the current financial cycle. With the Federal Reserve's quantitative easing (QE) coming to an end, greater pressures will emerge. Gold and Bitcoin, as hedges against fiat currency devaluation, will continue to attract investors.
The Root of Debt Expansion
Global debt is rapidly expanding. According to the International Monetary Fund (IMF), in 39 advanced economies, the debt-to-GDP ratio has risen from 110% in the 1950s to 278% by 2022. Since the 2008 financial crisis, the combination of global financial imbalances and ultra-loose monetary policy has caused a surge in debt levels. From the mid-2000s to 2022, public debt in advanced economies increased from 76.8% to 113.5% of GDP. Corporate debt has also surged, with outstanding non-financial corporate bonds reaching a record $16.6 trillion in 2021, more than double the 2008 levels. U.S. companies alone accounted for 40% of this debt. The U.S. debt problem is particularly acute, with defense spending, Medicare, Social Security, and rising interest costs exacerbating the growing deficit. A potential crisis is brewing, as the Congressional Budget Office (CBO) predicts that U.S. debt will rise to $52 trillion by 2033, increasing by an average of $5.2 billion per day, indicating that U.S. debt growth will far outpace overall economic growth.
The Consequences of Debt Monetization：
The real consequence of government debt default is inflation. Since governments are unlikely to default outright, they often resort to central bank bond purchases to monetize the debt, which eventually leads to inflation. Over the past decade, the Federal Reserve's balance sheet has grown by more than 500%. The CBO estimates that by 2033, the Fed's holdings of U.S. Treasuries will rise from nearly $5 trillion today to $7.5 trillion. After 2026, net interest payments on U.S. debt are expected to reach $1 trillion annually.
The Root Causes of Global Debt Expansion
- Transformation of the Financial System
After World War II, developed countries' financial systems generally operated as follows: households saved for precaution and retirement, these savings were channeled through the banking system and capital markets to fund government budget deficits, and then redirected to the corporate sector to finance working capital and investment. - Debt-Driven Economic Growth
As technological innovation slowed, developed countries became increasingly reliant on debt-driven growth. While debt expansion does not boost productivity, it can stimulate output growth by increasing demand and investment. - Central Bank Liquidity Injections
In this process, developed countries, through central bank liquidity injections, deliberately created an excess of liquidity to reduce debt costs. By utilizing international trade and capital flows, they exported excess cheap liquidity to other countries, raising debt levels and pushing the world toward the risk of a debt crisis. - Warning from the Bank for International Settlements
The Bank for International Settlements once pointed out in a report that without the amplifying effects of financing channels, the Latin American and Asian financial crises in the 1980s and 1990s would not have been so severe. Excessive debt and fragile financial structures made these emerging economies vulnerable to both internal and external shocks.
"Debt Refinancing" Has Become the New Financial Order
Global debt now stands at around $350 trillion, with an average maturity of five years, resulting in annual refinancing needs of $60–70 trillion. Today, financial cycles are no longer driven by interest rates or inventory cycles, but by liquidity - specifically, the availability of capital to meet these refinancing needs. When the demand for debt rollovers mismatches available liquidity, a refinancing crisis occurs. Crises ranging from the 1997 Asian Financial Crisis to the 2008–2009 Global Financial Crisis, and the 2022 UK bond crisis, were all examples of refinancing crises. This year alone, global refinancing needs are expected to reach $500–600 billion, approximately one-seventh of total global debt. Borrowing to pay off old debt has become the dominant theme in the global economy.
In this context, investors need to reassess their strategies. Traditional economic indicators may no longer be as predictive, and liquidity will be the key factor to watch. As global debt levels continue to rise and central banks continue printing money, the pressure on fiat currency devaluation will increase. Gold, as a traditional safe-haven asset, will see its value further enhanced. Cryptocurrencies, as decentralized digital assets with anti-inflationary characteristics, will also gain wider recognition in the future.
Therefore, investors need to closely monitor liquidity changes and actively allocate assets like gold and cryptocurrencies to hedge against potential future risks.