Current regime: Why debt is rising

Escalating global debt levels

Rising debt is a widespread phenomenon, underpinned by a variety of causes and catalysts. The debt levels among the world’s largest economies are quickly becoming one of the most substantial risk in the investing world today, but the risk has been brewing for decades.

The dynamics of rising debt accelerated in the 1980s, and the dynamic is widespread across the globe in both the public and private sectors. The total global debt ratio rose 75% from 1980 to 2018, with sovereign debt more than doubling during that period. In recent years, though, U.S. public debt has risen even during a peacetime expansion—the U.S. debt/GDP ratio now exceeds 100%, a level not seen since World War II.

Global Public and Private Debt as a Share of World GDP

Source: "Macrofinancial History and the New Business Cycle Facts" by Òscar Jordà , Moritz Schularick, and Alan M. Taylor (2017). Jordà-Schularick-Taylor Macrohistory Database, World Bank, International Monetary Fund, Bank for International Settlements, Fidelity Investments (AART), as of 12/31/18.

Demographic trends and fiscal pressure

The last decade has shown significant deterioration in demographic trends—there are now fewer working-age citizens relative to the rising population of retiree-age citizens, with expectations for continued deterioration in the next two decades. With more retiree pension and healthcare benefits to pay and fewer workers to support the system with tax contributions, fiscal balances have deteriorated across most of the industrialized world.

These poorer demographic trends have weighed on GDP growth, causing a headwind preventing national incomes from keeping up with global debt levels. Slower population growth was a direct cause of slower GDP growth for many advanced economies over recent decades. An increase in the labor force population contributed 2.3 percentage points to the U.S. economic growth rate during the 1960s and 1970s, but added only 0.8 percentage points during the past 20 years. 

The Number of Working-Age People Relative to the Number of Retirement-Age People

The demographic support ratio is calculated as the number of workers (15–64 years old)/the number of retirees (65 and older). Source: United Nations, Haver Analytics, Fidelity Investments (AART), as of 10/31/19.

Easy monetary policies

Monetary policymakers have accommodated the rising debt by continuing to lower interest rates and by purchasing government bonds via qualitative easing. Unfortunately, these actions haven’t spurred faster growth. Long-term government bond yields have slid to global historical lows, while central banks’ balance sheets expanded to record highs.

They have helped to reduce the volatility of GDP, as well as to boost the prices of financial assets. The average standard deviation in the U.S. GDP growth rate over the past 35 years is less than half the level of the decades that preceded it. Meanwhile, the value of financial assets relative to household disposable incomes hit record highs.

The Number of Working-Age People Relative to the Number of Retirement-Age People

Source: Federal Reserve Board, Bureau of Economic Analysis, Haver Analytics, Fidelity Investments, as of 12/31/19.

Secular trends, rapid technological innovation, and hyper-globalization eventually produced the 21st-century backdrop of slower economic growth, disinflation, lower interest rates, rising inequality, greater economic insecurity, and mounting fiscal pressures. We discuss the details of this confluence of political and socioeconomic crosscurrents in our paper “Rising Policy and Political Risk: Implications for Asset Allocation,” available below.

The long-term trends of rising debt levels and increasingly accommodative monetary policies became turbocharged after the 2008 global financial crisis. The path of least resistance is that they continue for the foreseeable future—but what does that mean for the future of the investment landscape and long-term asset performance?