Global debt and the potential impacts of decentralization.

"Global debt" refers to the total sum of all debts incurred by governments, companies, and individuals worldwide. Governments and businesses take on debt to make investments, build infrastructure, or finance social programs. Individuals borrow money to purchase consumer goods, finance education, or acquire real estate.

Debts usually come with interest. For example, you can lend money to the Swiss government by purchasing Swiss government bonds. In return, you receive a fixed interest rate each year and the borrowed amount back at the agreed-upon time. Switzerland is a country with high creditworthiness, so the likelihood of getting your money back is very high. However, for this low risk, you also receive less interest compared to countries that are less creditworthy.

In this way, countries can borrow money and accumulate debt, whether from individuals, businesses, or other nations. For instance, China is the country that has borrowed the most money globally.

Global debt is steadily increasing.

Global debt has increased significantly in recent years. According to the Institute of International Finance, global debt surpassed the $300 trillion mark in 2021.

The reasons for this sharp increase are diverse. In the past two years, the COVID-19 pandemic and the war in Ukraine have been major drivers. Another reason is the low-interest-rate policy of many central banks, such as the SNB or ECB. Low interest rates make it more attractive for governments, companies, and individuals to take on debt, as the costs for repaying the debts are lower.

Are high government debts a problem?

As long as debts and interest payments can be met, high debt levels are not a problem. However, this requires income and a well-functioning economy. Once the economic engine stalls or interest rates rise, high debt can lead to difficulties. An economic recession or an increase in interest rates can make debt repayment more challenging and increase the financial burden on individuals, businesses, and governments. Therefore, it is important to control and reduce debt during periods of economic growth to create financial resilience for potential crises.

To reduce high debt, governments may be forced to implement drastic austerity measures. This can lead to social unrest or a significant slowdown in economic growth. Debt also always creates dependencies on creditors, which can limit the sovereignty and agency of countries. If a country is dependent on foreign lenders, these creditors can also exert political pressure or impose specific conditions for lending, which can undermine the political and economic autonomy of the country in question. For this reason, sustainable debt policies are essential, aiming to keep debt at a manageable level and ensure long-term economic stability.

Right now, we are experiencing rising prices. Rising prices mean rising inflation. To counteract this, central banks are raising interest rates. Higher interest rates, in turn, make loans more expensive. For heavily indebted countries, this cycle can become problematic. When interest rates rise and borrowing costs increase, it becomes more challenging to repay debts, especially if the economy is already weakened. This can lead to a negative spiral where higher interest rates further increase debt and hinder economic recovery. Therefore, it is important for heavily indebted countries to keep their debt levels in check and develop strategies to stabilize their finances and reduce their reliance on expensive loans.

In the worst-case scenario, a debt crisis can occur. A country may then be unable to meet its financial obligations. Domino effects that impact other countries or the global economy as a whole cannot be ruled out. Such a scenario occurred in 2009 when Greece was on the brink of insolvency. The EU did everything it could to prevent a Greek state bankruptcy at that time.

Central banks, such as the Swiss National Bank (SNB), the European Central Bank (ECB), or the American Federal Reserve (Fed), must carefully weigh their interest rate decisions to ensure a stable economy and stable prices. This is a balancing act that is not always successful. If interest rates are raised too quickly or too significantly, it can stifle economic growth and lead to a recession. On the other hand, too-low interest rates can fuel inflation and create bubbles in financial markets. Therefore, it is essential for central banks to pursue a prudent and flexible monetary policy that responds to current economic conditions and challenges.

Currently, many voices see significant risks for the global economy in the high levels of global debt combined with rising interest rates. Would such a situation have been possible with cryptocurrencies, like Bitcoin, Ethereum, or Solana, in a decentralized financial system?

In a decentralized financial system, all participants can interact directly with one another and lend, borrow, or exchange digital assets. Anyone can become both a lender and a borrower. In such a system, it would be more challenging to incur large debts globally, as there would be no central lenders or financial markets. This would also lead to broader access to financing and reduce dependence on intermediaries like banks and central actors. In contrast, traditional financial markets are currently controlled by a small number of key players, such as banks like UBS or Credit Suisse. This can lead to manipulation of even large markets. A notable example is the LIBOR scandal that occurred in the early 2010s, when some of the world's largest banks colluded on interest rates. In a decentralized financial system based on cryptocurrencies like Bitcoin, Ethereum, and others, this type of manipulation is more difficult, as transactions are transparent and publicly traceable.

Unlike conventional currencies such as the US dollar, euro, or Swiss franc, some cryptocurrencies, like Bitcoin, have a capped maximum supply. Therefore, only as many units can be borrowed as are available. This limited supply of cryptocurrencies like Bitcoin, combined with a decentralized system without a central authority, helps strengthen trust in the currency and prevent potential inflation. In contrast, conventional currencies can be printed without limit, leading to currency devaluation and ultimately rising inflation. This difference makes cryptocurrencies like Bitcoin an attractive option for those looking to protect themselves against the risks of inflation.

In theory, Bitcoin and cryptocurrencies could thus create a decentralized financial system, thereby alleviating the dangers of excessive global debt. Whether this will materialize in practice remains to be seen. The idea of a decentralized financial system based on cryptocurrencies undoubtedly has the potential to revolutionize traditional financial markets and reduce reliance on central authorities and institutions. By utilizing blockchain technology and smart contracts, cryptocurrencies could offer a more transparent, efficient, and secure way to transfer value and conduct financial transactions. However, there are still several challenges and regulatory hurdles that need to be overcome. It remains to be seen how the development of the cryptocurrency market will unfold in the coming years and what role it will play in the global financial landscape.