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Picking Up The Interest Tab

Did you know? In 2021 the total interest paid by the world was $10.5 Trillion.

Now that such an eye-opening fact would have surely created a curiosity to know more, let us get into more details.

As of yesterday United States of America reached a total outstanding debt of $30 Trillion, this is after printing forty percent of total currency to date in the last two years. Many such examples of large-scale debt increases are available throughout the globe specifically in developed nations.

The problem is that at such a large debt level is not only the problem of the issuer country but the whole world. Let me explain when such a large amount of money is issued there is an exaggerated level of demand for goods and services. This demand is not matched by the supply resources at the scale required leading to large price hikes of anything and everything.

This is the phase we are at, high inflation along with high uncertainty of future demand and supply. To fight this developed nations have decided to exit the loose policies and central banks to hike interest rates.

These rate hikes and tightening of policy is the worst risk especially for the emerging nations that did not participate in such exercise of excessive money printing as compared to developed nations.

Given the path of rates is on the higher side, it does not guarantee to be a smooth one given so many variables are uncertain. The problem does get amplified when small rate hikes in developed nations result in large rate hikes in emerging nation sovereign and corporate interest rates especially when inflation risk is highest. This might result in capital flight to safety in a quick period and a perfect scenario for a financial crisis in the short term.

In the end, if the rate hike path is followed without many reversals then some simulations suggest the total interest payment of the world be $15 Trillion by 2026.


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