Debt-to-GDP Ratios

“If debts are not to be reneged upon, they must either be repaid or somehow refinanced. However, not only is much of the new debt taken on since the 2008 financial crisis unlikely to be paid back but, more worryingly, it is compounding ever higher. Our latest estimates suggest that world debt levels now exceed $250tn, equivalent to a whopping 320 per cent of world gross domestic product—and roughly double the $130tn pool of global liquidity.”

—Michael Howell, Financial Times, January 15, 2020

This is a topic I have been interested in for a long time: the ratio of total debt to GDP. What does this ratio mean and how does it effect the economy? I have heard the theory that as the total debt to GDP ratio rises, it becomes more difficult for businesses to expand production. While a certain level of debt is necessary to sustain growth in a capitalist economy, as the debt rises, the burden associated with servicing the debt grows and there is less capital available for productive investment. This is obvious at the enterprise level, and it seems likely it translates to the macroeconomic level as well.

The first question is, what level does this ratio need to reach before the debt cannot be repaid? For that, I would love to see some historical data in order to see what level this ratio reached at key economic turning points such as asset bubbles and liquidity crises. For example, what were the ratios leading up to the market crashes of 1929 and 2008? Was the threshold similar in each case? If not, what other factors may have instigated each crash?

The second question is, how does this ratio change in the aftermath of these crises? Does the debt clear out and to what degree? Without having analyzed the data, my sense is that much of the debt cleared out after the 1929 crash, but only a small fraction of it cleared out after the 2008 crash and the ratio subsequently increased and is now even higher.

This leads to the third question: what role do central banks play in influencing the allowable level of debt in the economy? Central banks’ seem to have had great success in using permanent policies of low interest rates and quantitative easing since 2008 to prevent liquidity crises from escalating into a major depression. Will this success continue? If so, for how long? Is a deflationary credit collapse inevitable, or will the economy continue to muddle by with occasional recessions punctuated by liquidity injections by central banks?

And fourth, what other contradictions of the capitalist system might play a role in precipitating a deflationary credit collapse and major depression such as the Great Depression? Have central banks been able to sustain elevated debt-to-GDP ratios due to the abeyance of factors such as working class struggle over surplus value? Does successful working class struggle have an effect on the allowable debt-to-GDP ratio in the economy? Is the success of central banks’ crisis-avoidance measures predicated on a the ability of the capitalist class to unite and hold in abeyance the struggle of blocs of capital against one another?