Economic growth is accelerating across most of the world. Yet the world’s total gross debt-to-GDP ratio has reached nearly 250 percent, up from 210 percent before the global economic crisis nearly a decade ago, despite post-crisis efforts by regulators in many important economies to drive the banking sector to deleverage. This has raised doubts about the sustainability of the recovery, with some arguing that a rise in interest rates could trigger another global crisis. But how likely is that to happen?

To answer this question, one must recall that debt is both a liability and an asset. In a closed economy—and we don’t owe anything to non-Earthlings—overall debt and the corresponding assets necessarily cancel each other out. So what really matters is the composition of debts and liabilities—or, to put it simply, who owes what to whom.

High public-sector debt, for example, signals the possible need for tax increases—the opposite of the tax legislation being advanced by Republican legislators in the United States—and/or higher interest rates (real or nominal, depending on monetary policy and inflation). If debt is owed largely to foreign lenders, interest-rate risk is compounded by exchange-rate risk.

For private-sector debt, much depends on its type: the hedging sort, where a debtor’s cash flow covers all obligations; the speculative type, where cash flow covers interest only; or the Ponzi kind, where cash flow does not even cover that. As the late American economist Hyman Minsky explained, the higher the share of debt that falls into the speculative or Ponzi categories, the higher the risk that a confidence shock will trigger a sudden wave of deleveraging that quickly morphs into a full-blown financial crisis.

For both public- and private-sector debt, maturities also play an important role. Longer maturities leave more time for adjustment, lowering the risk of a confidence shock. Yet while it makes little sense to focus on simple aggregate figures, both public institutions and private researchers tend to do precisely that. Consider the coverage of the Greek debt crisis. Headlines tracked the debt-to-GDP ratio’s climb from 100 percent in 2007 to 180 percent this year, yet little attention was paid to private-sector debt. And, in fact, as foreign public creditors replaced private debt holders and interest rates were lowered, Greece’s overall debt, while still high, became more sustainable. Its continued sustainability will depend partly on the trajectory of Greece’s GDP—the denominator in the debt ratio.

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