Today, the U.S.’s debt-to-GDP ratio (the ratio between a country’s government debt and its gross domestic product) stands at 121 percent according to the Federal Reserve Bank of St. Louis. However, we’re not the only country at risk. Italy is at 139 percent, Greece at 153 percent, Singapore at 176 percent, and Japan is at a whopping 249 percent. All of these countries face slow-growing economies, potentially higher borrowing costs, reduced services to future generations, and most important, raise the risk of a global financial crisis.
How did countries manage to saddle themselves with enormous debt? More important, how can they get out? That’s the topic of The Age of Debt Bubbles (Springer, 2024), edited by Max Rangeley. Many books approach this topic from an academic viewpoint – but the topic is hardly academic at all. One country’s default would have worldwide consequences, affecting the poorest of the poor all the way to the top 1 percent, who could see their fortunes erased overnight.
Mr. Rangely’s book has two parts. First, he provides an academic analytical framework written by economists including Roger Koppl of Syracuse University and Harry Richer, a policy researcher and political adviser in the U.K. He then offers the practical experience of senior policymakers who provide their real-world experiences in tackling debt with William White of the International Bank of Settlements and Lord Syed Kamall, a former member of the European Parliament. The combination of academic rigor and hands-on experience is both powerful and provocative.
Leveraging both perspectives, the authors persuasively challenge the prevailing dogma that calls for the central bank (the Federal Reserve) to employ discretionary monetary policies to establish a stable-low inflationary economy. In practice, the policies are inadvertently subsidizing financial risks and suppressing interest rates. Consequently, rather than serving their intended stabilizing role, the policies of the Federal Reserve and central banks around the world have become a primary source of economic instability and financial bubbles. And whether it is the Dutch tulip craze hundreds of years ago or the mortgage crisis a decade ago, financial bubbles rarely end well.
Facing a bubble of their own creation, the response of the Federal Reserve then further worsens the situation because their policies aimed at lessening the inevitable economic pain socialize private risk and prevent the necessary financial resets. Consequently, their response to the current crisis sets the conditions for the next crisis to emerge. In this manner, the flash crash of 1987, dot.com bust of 2000, and monetary mortgage debt crisis of 2008 are all interconnected and the inevitable result of our current approach to policy. More dire, the authors warn that the severity of each crisis grows over time, which is troubling as the cumulative responses to all of these past crises have built up to an even larger bubble today.
Today’s bubble impacts a wide range of assets and includes today’s unsustainable levels of government debt. By suppressing interest rates from the end of the mortgage debt crisis up to the recent inflationary surge, the Federal Reserve encouraged politicians to embrace their spendthrift desires. Given such incentives, it should not be surprising that the U.S. debt levels grew to unprecedented levels over the past decade. And this brings us to our current situation.
We find ourselves in a clash of wills — a central banker who is worried about decades of easy money policy that helped fuel this nation’s debt and a President who wants to keep interest rates low and keep the party – and a sense of “prosperity”– going. Mr. Rangely writes: “I hope that this book will go some way in explaining how debt bubbles form and why they are so destructive to the economy, and in doing allow us to think more deeply about how we might move towards a more rational and prosperous financial monetary system.” President Trump and Chairman Powell would both do well to read Mr. Rangely’s book.
Rowena Itchon is chief operating officer and Wayne Winegarden, Ph.D., is senior fellow in business and economics at PRI.
