How much is too much global debt?

Text size: aA aA aA
At today's higher interest rates, debt is climbing to record levels. Find out what that could mean for corporate earnings and the markets in 2024.
A record high $307 trillion — that's the amount of money owed by governments, corporations and consumer households worldwide in 2023.Footnote 1 "U.S. government spending rose by $162 billion in the last year just to cover interest on the nation's debt," notes Lauren Sanfilippo, senior investment strategist in the Chief Investment Office (CIO) for Merrill and Bank of America Private Bank.
[On-screen text]
Please read important information at the end of this program.
Recorded on 11/16/2023.
[On-screen text]
Chris Hyzy
Chief Investment Officer
Merrill and Bank of America Private Bank
[Chris Hyzy speaking]
Hello, I'm Chris Hyzy. We're looking at the national debt situation, and not only the national debt situation, global debt in general. I'm here with Lauren Sanfilippo to discuss the implications about our own national debt as well as potential risks and opportunities in the markets for the foreseeable future.
So, first and foremost, estimated, give or take, $300 trillion of global debt; pinpoint in the United States alone, over $33 trillion. You recently wrote a report discussing a lot of the implications and dynamics of this debt.
[On-screen text]
November 6, 2023 Capital Market Outlook, "Is the Debt Wall Scalable?"
[Chris Hyzy speaking]
You want to take us through some of the high points of that?
[Lauren Sanfilippo speaking]
[On-screen text]
Lauren Sanfilippo
Senior Investment Strategist, Chief Investment Office
Merrill and Bank of America Private Bank
Yeah, I think this is topical now just given how much money we've spent since the pandemic, right, and accumulated all this debt.
[On-screen text]
Total global debt surged to a record-high
of $307 trillion in 2023.
Source: The Institute of International Finance.
Data as of October 2023 for the first six months of 2023
$307 trillion's a big number. Of course, like you said, $33 trillion sitting with Uncle Sam, and that's come at the cost of rising defense spending, of course, as well as sort of financing this decarbonization, right, that requires capital, and now we're thinking about this higher interest rate environment and what debt service means in the future and the outlook next year. So, it's a confluence of really all those factors.
[Chris Hyzy speaking]
That's a good point because we talk about this wall, how are we going to scale the debt wall? It's actually a mountain if you really think about it. And when you think about why we're in this situation, there's a lot of reasons, but also the aging of society and the fact that an estimated 10,000 people turn 65 every day between now and say 2030.
So, that mountain could keep climbing up. At what point does the investment community say no more?
[Lauren Sanfilippo speaking]
Right, well I think we need to think about what this means for investors, right? And so, I think just blowing this out, not just government debt, because there's a lot of corporate debt out there, there's a lot of consumer debt.
If you look just what's with the consumer, it's what, $20 trillion, just around.
[On-screen text]
Total amount of U.S. consumer debt is
still healthy and manageable.
And I think their debt service as a percent of disposable income is still healthy and manageable. So, I think that's an important factor, just looking at the consumer outlook.
And then with corporates, talk about scaling a wall here, for small caps, actually, they look a lot more challenged, right, with a steeper wall of maturity next year, just in the nearer term.
[Chris Hyzy speaking]
You mentioned the fact that consumer balance sheets are healthy, corporate balance sheets, at least for a majority of corporate America, are still very healthy. They did their job. They extended their debt, they took on debt when rates were really low. The consumer did it in their homes. So, a bright spot here is, yes, there's a mountain of debt. Interest costs are going up for the government. On a relative basis, in terms of the private sector, is still healthy.
So, could you get a balance in these next few years, in your opinion, that says it's an issue, we have to deal with it, and for now, we can continue a pace and create a real economy even in the face of such a thing as large as the national debt.
[Lauren Sanfilippo speaking]
Right. And you're seeing a little bit of cracks, right. So, consider what's happening with consumer. There are some delinquencies that are ticking up. So, there are some cracks showing, but like you said, most of this looks pretty manageable. I think it's with Uncle Sam where the real red flags start to be thrown, yeah.
[Chris Hyzy speaking]
What are some of the bigger opportunities and risks out there in the face of this?
[Lauren Sanfilippo speaking]
Well, the real risk is the market isn't pricing this correctly, right, and that actually could afford us some opportunities.
[On-screen text]
Consider opportunities in high-quality assets,
across fixed income and equities.
But I also think that we need to double down on that high quality scenario that we're talking about for next year, that bias, and that's across fixed income and equities.
[Chris Hyzy speaking]
With that in mind, any particular thoughts before we close on that and what we know is coming in the year ahead?
[Lauren Sanfilippo speaking]
Just a final thought, investors shouldn't lose sight of the fact that debt, while being very high, these levels actually are a little bit manageable across consumers, corporates and actually the government.
[On-screen text]
While high, current debt levels are still manageable
for consumers, corporations and the government.
And really, the ace up Uncle Sam's sleeve is the idea that he has the private sector behind, right. And that's producing healthy profits, growth and that's the dynamic we see continuing at least into the new year.
[Chris Hyzy speaking]
Well, that's a great segue to launch what's coming:
[Lower 3rd]
Watch our webcast "Looking toward a new era of growth,"
available for on-demand viewing on Dec. 14 at 2PM ET.
Which is our December 14th webcast that we're titling "Looking toward a new era of growth," focusing on the private sector, focusing on markets and the implications for the economy in the year ahead.
Thanks for joining us.
[On-screen disclaimers]

Important Disclosures

The opinions expressed are as of 11/16/2023 and are subject to change.
Investing involves risk, including the possible loss of principal. Past performance is no guarantee of future results.
This information should not be construed as investment advice and is subject to change. It is provided for informational purposes only and is not intended to be either a specific offer by Bank of America, Merrill or any affiliate to sell or provide, or a specific invitation for a consumer to apply for, any particular retail financial product or service that may be available.
Bank of America, Merrill, their affiliates, and advisors do not provide legal, tax, or accounting advice. Clients should consult their legal and/or tax advisors before making any financial decisions.
All recommendations must be considered in the context of an individual investor's goals, time horizon, liquidity needs and risk tolerance. Not all recommendations will be in the best interest of all investors.
Investments have varying degrees of risk. Some of the risks involved with equity securities include the possibility that the value of the stocks may fluctuate in response to events specific to the companies or markets, as well as economic, political or social events in the U.S. or abroad. Stocks of small-cap companies pose special risks, including possible illiquidity and greater price volatility than stocks of larger, more established companies.
Investing in fixed-income securities may involve certain risks, including the credit quality of individual issuers, possible prepayments, market or economic developments and yields and share price fluctuations due to changes in interest rates. When interest rates go up, bond prices typically drop, and vice versa.
The Chief Investment Office (CIO) provides thought leadership on wealth management, investment strategy and global markets; portfolio management solutions; due diligence; and solutions oversight and data analytics. CIO viewpoints are developed for Bank of America Private Bank, a division of Bank of America, N.A., ("Bank of America") and Merrill Lynch, Pierce, Fenner & Smith Incorporated ("MLPF&S" or "Merrill"), a registered broker-dealer, registered investment adviser and a wholly owned subsidiary of Bank of America Corporation ("BofA Corp.").
Merrill makes available certain investment products sponsored, managed, distributed or provided by companies that are affiliates of BofA Corp. MLPF&S is a registered broker-dealer, registered investment adviser, Member SIPC and a wholly owned subsidiary of BofA Corp.
Merrill Private Wealth Management is a division of MLPF&S that offers a broad array of personalized wealth management products and services. Both brokerage and investment advisory services (including financial planning) are offered by the Private Wealth Advisors through MLPF&S. The nature and degree of advice and assistance provided, the fees charged, and client rights and Merrill's obligations will differ among these services. Investments involve risk, including the possible lo ss of principal investment.
The banking, credit and trust services sold by the Private Wealth Advisors are offered by licensed banks and trust companies, including Bank of America, N.A., Member FDIC and other affiliated banks.
Bank of America Private Bank is a division of Bank of America, N.A., Member FDIC and a wholly owned subsidiary of BofA Corp. Trust and fiduciary services are provided by wholly owned banking affiliates of BofA Corp., including Bank of America, N.A.
Investment products:
Are Not FDIC Insured Are Not Bank Guaranteed May Lose Value
© 2024 Bank of America Corporation. All rights reserved. 6106989 - 11/2023
[End of transcript]
Clearly, today's higher-for-longer interest rates are making borrowing more expensive for households, businesses and governments, and that debt load could have a major impact on market performance and the global economy in 2024, adds Chief Investment Officer Chris Hyzy. In the video above, Hyzy sits down with Sanfilippo to discuss the potential risks and opportunities that debt at these levels might represent for investors.
For a deeper dive, read Sanfilippo's "Is the debt wall scalable?" in the November 6 Capital Market Outlook (PDF). And tune in to our Outlook 2024 webcast, "Looking toward a new era of growth," on December 14 for more insights on the forces that could shape the markets and economy in the coming year.

Next steps

Footnote 1 The Institute of International Finance. Data as of October 2023 for the first six months of 2023