Why the cost of buying economic growth is destined to rise
News Summary
Despite ongoing global conflicts, trade wars, and other traumas characteristic of the Donald Trump era, the global economy has shown resilience, with financial markets remaining buoyant. However, this growth is being “bought” through large-scale borrowing by governments, companies, and households, particularly in economies like China, Japan, and the United States. Official bodies such as the International Monetary Fund (IMF) have long cautioned about rising international debt levels, with recent warnings reaching a new pitch, including from a report by the Institute of International Finance (IIF). The IIF’s report, “Seismic Shifts in Global Debt Markets,” noted that global debt rose by over US$21 trillion to a record US$338 trillion in the first half of 2025, marking its sharpest increase since the emergency fiscal reactions to the Covid-19 pandemic five years ago. Major factors driving the sharp and ongoing build-up in government debt across advanced economies include increased defense spending, pressured by the Trump administration and the perceived need to keep pace with rival nations. Additionally, rising healthcare demands due to demographic factors and the costs of natural disasters caused by climate change are significant contributors. Borrowing needs in many advanced economies remain well above pre-pandemic levels, with no apparent signs of a reversal.
Background
The global economy, under President Trump's current administration, is navigating persistent geopolitical conflicts and trade tensions, directly influencing international relations and national fiscal policies. Concurrently, demographic shifts worldwide are driving up healthcare expenditures, and the increasing frequency of climate change-induced natural disasters are placing immense pressure on government finances globally. Since the onset of the COVID-19 pandemic in 2020, governments worldwide implemented unprecedented fiscal stimulus measures to counteract economic shocks and public health crises, leading to a dramatic surge in global debt levels. By 2025, the global economy faces the challenge of managing this substantial debt while attempting to sustain growth. Institutions like the International Monetary Fund (IMF) and the Institute of International Finance (IIF) have consistently warned about this trend.
In-Depth AI Insights
What are the long-term implications of this surge in global debt for capital costs and risk premia? - Persistent debt accumulation, particularly when driven by non-productive expenditures like defense and healthcare, will exert pressure on sovereign credit ratings, inevitably raising government borrowing costs in the long run. - Investors will demand higher risk premia to hold sovereign bonds due to increased concerns about future repayment capacity, a trend that will subsequently spill over into corporate and household borrowing costs. - Elevated debt levels restrict the ability of central banks and fiscal authorities to stimulate economies during future downturns, potentially leading to deeper recessions and thus increasing systemic risk. How does the Trump administration's defense spending prioritization specifically alter global capital flows and industrial investment? - The Trump administration's push for increased defense spending will channel significant capital towards the defense industry and its supply chains, potentially diverting investment from other sectors such as infrastructure or green energy. - Increased defense budgets by allies and rivals, driven by the need to