GLOBAL SOVEREIGN DEBT TRAP

At $300 trillion of global debt, a 1% hike in interest rates could translate into $3 trillion additional interest outgo, equivalent to India's nominal GDP.

- RAJIV RANJAN SINGH

IT IS THE CENTRAL banks that are entrusted with the task of maintaining price stability in a nation. They did that with the classic tool of interest rates raising them to curtail inflation when it was high, and cutting them when economic growth and inflation were low. But over years, central banks around the world over-stimulated prices and inflation by printing money and lowering interest rates.

After the 2008-09 Global Financial Crisis, bankers took on the responsibility of vanquishing all economic challenges. They battled economic stagnation by stimulating growth, fought unemployment by boosting industrial growth, subjugated economic slowdown by lowering interest rates, and promoted consumerism by printing more currency.

Now, retail inflation in the U.S. and Germany at 8.5% and 7.3%, respectively, is the highest since 1981. India is facing double-digit WPI inflation for the past year. But central bankers are missing in action. Lack of action against inflation from a community that never shied away from printing currency and heralding a negative interest rate regime is concerning.

Especially since the world is now in a debt trap. Any move to escape the debt trap quickly could sink the world into recession. Increasing interest rates is the only way to reduce debt a proclivity. It means higher pay-out by indebted governments, corporates, and households leading to lower disposable income, reducing demand, and in turn a slower economy.

Global Debt Trap