Debt, which was supposed to be an answer for all the economic troubles in past 2-3 decades, has itself become the problem, worldwide. Debt seemed to answer all the problems. Be it the need to pacify the growth of a company or satisfy individual needs, debt was in demand. From individuals to companies, bank to governments, debt increased at every level. During the EU meet in the month of May, 2010, a proposition was made to rescue Greek crisis. In fact EU proposed $900 billion (€750 billion) consisting of even more borrowed money. As per the survey made by McKinsey Global Institute, the average total borrowed money (combining public and private sector) in 10 leading economies of the world rose to 300% of their GDP in the year 2008, from the level of 200% in 1995. The figures were even worse in Ireland and Iceland, which clocked the debt-to-GDP ratio of 700% and 1200% respectively. The debt burden led to an economic crisis in both the countries. This is a clear sign that debt is not a readymade solution as it was supposed to be. The start of year 2007 showed the signs of economies reaching the extreme limit of their borrowing capacity.

In the year 2008, in the US alone, private-sector debt rose to the level of 300% of GDP from the level of 50% in the year 1950. Consumers and companies both leveraged up. Companies showing cash in the balance sheet were criticized. And finance industry led the addiction to leverage. Debt was is demand for consumers, as it supported to maintain their lavish life style desired spending level. Companies were optimistic for the expectation of even better return over the cost getting the debt. There was simple belief – take loan and by an asset, then take rest to see the hike in price. Hedge funds and private equity funds created many billionaires using debt. Authorities encouraged all these activities. Anyone cautioning against soaring debt level, were laughed out, as rising asset prices gave balance-sheets a healthy look. Any threat to economy due to debt resulted in lowering of interest rates by central banks, every time. Such rescue measures reduced risks on taking even more loans.

The need to repay the debt itself is a big problem. In case of creditors losing faith in borrowers, they would either refuse to renew old debt or demand the repayment. The debt-value is fixed, whereas value of asses can depreciate. If debt is secured against assets (as in most of the cases), then it may force the borrower to sell it. A bunch of such forced cases would result in sharp decline in the price of assets, resulting in even less willing creditors to extend the debt. Worst scenario is price of asset falling below the debt value, as in this case both borrowers and creditors would lose money. The role of banks in economy is another reason, good enough to lead a debt crisis. These effects were visible during 2007-08 sub-prime crisis. Continued fall in property rates resulted defaults and severe liquidity problem with banking system prompted authorities to come up with bail-out packages. Seeing it another way – much of debt has just moved from private sector to public sector.

Now, paying off their debts is not the only problem that developed economies are facing right now. The future problem is raising even more money as per governments’ plans for health care and pensions. Policymakers will have to find their own ways to reduce the huge burden of debt, that too not at the cost of growth. As government borrowed from the future, for gen-next repaying it would be difficult.