Why is the rising world debt a concern for everyone?

The world is $281 trillion in debt as per the Institute of International France (IIF) mentioned in a report from February 2021. This is more than 500% of the world's total GDP. Is it possible for the entire world to be in debt? To whom does the world owe this debt? How can this debt be more than the world's total GDP? Why is this debt increasing and why should you care about it?

The short answer to whether the world is in debt or not is yes, the entire world is in debt. Who is it in debt to? to the world itself. How is that possible you ask? For that, we need to look at the longer explanation.

Assume a hypothetical world where people could only exchange money for goods and services and the concept of borrowing or lending did not exist. In that case, every time a transaction would happen, one person would receive goods/services and the other person would be paid for it in exchange and neither of the two transacting parties would be in debt. Hence there would be no debt in the world.

But we don't live in such a hypothetical world. Now you may be able to guess where the problem starts arising from. It comes from the concept of lending and borrowing. At a micro level, if person B borrows Rs. 100 from person A at 10% interest per annum for a year, then person B needs to return Rs. 110 to person A at the end of the year. Till then, person B is in debt of person A.

At a macro level, governments do the same. They create bonds that are promissory notes which everyone has agreed that the government will adhere to. They sell these bonds to the people within the country and to other countries willing to buy them with an agreement to be paid interest for the holding period. But why would the government need to do so? To meet the current financial needs of the country or to fund projects today instead of having to wait for the cash to come in through other means after some time. So how is the government going to pay back this interest to those buying these bonds? By using our own future tax money since that is the major source of government income. So the interest you earn from the bond you buy today will in a way come from your future taxes.  

Not all debt is bad and there are many reasons governments choose to hold debt. For example, the US owes a debt to China and China owes a debt to the US. A logical question would be why don't they transact to have only one owe a debt to the other instead of both owing to each other. The answer to that lies in the volatility of their currencies. Countries choose to hold other countries' debt instruments as a hedging mechanism in case their currency value depreciates. That way, the bonds of other countries will reduce the risk governments hold in case of currency value fluctuations.

One way to look at this entire debt scenario is that the world today is borrowing money from its future with a promise to repay it. But why is this debt increasing? With globalization, all nations are competing on the world stage and everyone wants to grow faster than others to be better equipped to seize future growth opportunities. This coupled with rising conflicts around the world along with the covid-19 pandemic is causing governments to take on more and more debt to revive their economies and put them back on the growth trajectory.

How long can the world sustain this increasing debt and is it possible for debt to lead to the collapse of global economies? Something of that sort happened to Lebanon. Inefficiency and corruption amongst other factors led to the collapse of the Lebanese economy and thus a rapid decline in the value of their currency which led to the printing of more currency which is leading to a further fall in value. That's how a vicious cycle emerges and it becomes difficult for countries to get out of it. Now irrespective of how hard someone in Lebanon worked to build their corpus, through no fault of their own, suddenly lost a huge portion of their  capital due to this currency depreciation. That's why it's important for us as citizens to ensure the government is held accountable and isn't allowed to keep taking infinite debt to avoid such a spiralling situation.

Do you think the world debt will decrease in the future or would it continue to rise? Let me know your thoughts on this.