LONDON: The global financial crisis of 2008 was supposed to have taught the world the dangers of excessive debt. But borrowing has shot up since then. The debt of governments, companies and households was 195 per cent of global GDP in 2007, according to the International Monetary Fund. By the end of 2020, it had reached 256 per cent.

These debt mountains are harder to bear because interest rates are rising to stamp out inflation, the Covid-19 pandemic and the energy crisis have clobbered growth, and investors are more averse to risk. This will cause economic stress especially in Europe, China and the Global South, poisoning domestic politics and geopolitics.

Debt has risen for three main reasons. First, governments bailed out the financial system. Then they supported households and companies during the pandemic. Now they are cushioning the blow of eye-popping gas and electricity prices.

Cheap money enabled these splurges. In the West, this came in the form of quantitative easing (QE), where central banks bought government bonds and other assets. While they were right to use QE to prevent an economic slump, cheap money has been a painkiller. Many governments stopped worrying about balancing their books. Companies and emerging markets also leveraged up.

If the borrowers had used the money to fund productive investments, that might not have mattered. But instead, they spent much of it on unproductive investment or consumption.

China’s excess property construction is a prime example of unproductive investment. The country’s debt as a proportion of GDP has doubled since 2007, according to the IMF. This is suffocating its economy and is one of the reasons the World Bank has just slashed its growth forecast for China this year from 5 per cent to just 2.8 per cent.

Meanwhile, European governments’ massive support operations during the pandemic and the energy crisis are classic examples of borrowing to fund consumption. Politicians have made little attempt to target subsidies at the most vulnerable.

The poor productivity of this borrowing can be seen in the data. In the past decade, global debt has risen by $90 trillion, whereas GDP has grown by only $20 trillion, according to Sonja Gibbs, who leads the Institute of International Finance’s (IIF) debt policy work.

Artificially cheap money has also encouraged risky behaviour. Investors have used leverage to help them chase higher returns while funding long-term assets with short-term borrowing. The UK pension fund industry, which effectively received a bailout from the Bank of England last week, is a good example of the former. The British habit of funding house purchases with mortgages whose interest rate is floating or fixed for short periods is an example of the latter. Other problems are bound to emerge now the era of cheap money is ending.