National Debt Origins: Exploring the Source of Defense Financing

In a concerning development, the World Bank's Chief Economist, Indermit Gill, has warned of a global debt crisis that is causing significant harm to countless poor people around the world. This crisis, fueled by the global financial crisis and the COVID-19 pandemic, has led to higher public debt in many economies.

Yields on US Treasury bonds are on the rise, causing concern, as they have reached their highest level since 1998, putting pressure on the US government to regain investor confidence. Similarly, yields on 30-year UK bonds have reached their highest level since 1998, with the UK's Chancellor facing a budget deficit of around £50 billion.

The International Monetary Fund (IMF) Chief Economist, Gita Gopinath, considers the market for long-term bonds from France, the UK, and the US as fragile. In France, the government is on the brink of collapse due to political pressure on an austerity package for 2026, leading to higher interest rates for France's new debt.

Productivity growth has been declining in many advanced economies for decades, and social safety nets are under strain. In the US, Social Security has been cut, unemployment benefits are to be reduced in Britain, and pension funds are seen as needing to be saved in all countries.

The public debt ratio of industrial countries, as per the Organisation for Economic Co-operation and Development (OECD), is now 115 percent of economic output (GDP), more than 40 percentage points higher than at the beginning of the century. The public debt ratio of the USA could reach 120% of GDP by 2035.

Economic growth has not kept pace with debt, leading to more public debt being needed to finance declining growth. The increase in public debt is less due to profligate social policy and more due to governments' attempts to rescue banks, stabilize the financial system, and cushion downturns.

The debt of companies worldwide is also increasing, reaching record highs in some countries. This trend, coupled with the ongoing debt crisis, has led to warnings such as The Sunday Telegraph's prediction that the UK is heading for an IMF bailout.

The US dollar is approaching a crisis of confidence, according to ING, and The Financial Times has headlined "Pray for the US Treasury market." Germany's defense budget is set to reach €153 billion by 2029, with €70 billion for military infrastructure, which, by 2029, spending on defense (excluding infrastructure) and interest will account for almost 40% of the federal budget.

Governments are restructuring their locations to meet investors' demands, leading to a new round of "austerity" politics. This is evident in countries like Germany, where the government (Union and SPD) faces pressure to reform social policies such as Bürgergeld (basic security for job seekers) with demands for significant cost savings and stricter sanctions to comply with budgetary constraints and market expectations.

Chile under President Gabriel Boric is another example, as the government is pressed to increase concessions to financial markets and meet conditions for further loans, especially in the face of economic challenges and failed constitutional reforms.

As the global debt crisis deepens, it is crucial for governments to find a balance between meeting the demands of financial markets and protecting the welfare of their citizens. The stakes are high, and the future of many economies hangs in the balance.