Huge public, corporate and household debt looks like the ‘new normal’ for the global economy – until the next crisis

• Large debts at the public and private level may not matter as long as growth continues and interest rates remain low
• That could all change should a new financial crisis creep up on the global economy, as has happened before

In the "new normal" economic world, many beliefs have been turned on their head. Trade wars supposedly do not cause lasting harm, declining corporate output, earnings and investment are no cause for alarm, stock prices can go on rising regardless, and record global debt is nothing to lose sleep over.

Debt has now hit what the Institute of International Finance (IIF) in Washington calls "mind-boggling" proportions and Unctad – the UN body dealing with trade, investment and development issues – has warned of a new debt crisis. Yet, markets remain unfazed. It seems that "all is for the best in the best of possible worlds", to quote Professor Pangloss in Voltaire's Candide.

The debt mountain has grown hugely, not only in Asia but also in the United States and Europe, and governments have become as heavily addicted to borrowing as have corporate and household sectors (in China especially).

As Changyong Rhee, director of the Asia and Pacific Department at the IMF in Washington noted to me, "In emerging economies, debt is a problem, but if you look at how it has increased in advanced economies, that is also very large."

Global debt surged by US$7.5 trillion in the first half of this year alone, reaching a record of US$251 trillion, according to the IIF. "With no sign of a slowdown, we expect the global debt load to exceed [US]$255 trillion in 2019 – largely driven by the US and China," it says.

Economist Olivier Blanchard, seen in Hong Kong in July 2010, has argued for the "judicious use of deficits" to stimulate demand. Photo: K. Y. Cheng

Piling up debt is even gaining intellectual respectability among some leading economists such as Olivier Blanchard, a former chief economist at the IMF, and now a senior fellow at the Peterson Institute for International Economics in Washington.

They argue (in line with modern monetary theory) that those governments which can issue generally accepted currencies (dollars, euros or yen) should borrow freely to finance fiscal stimulus while interest rates remain low.

The world's principal central banks are also increasingly arguing that monetary policy cannot go on indefinitely being the only game in town, and that fiscal policy needs to do more to assist growth (or stave off recession).

Maybe. But since governments can hardly raise taxes to spend more unless they want to tip their delicately poised economies into recession, they will need to borrow more, and that will increase competition for funds.