Global debt and the influence of Bitcoin and Co.

Global debt" is the sum of all debts incurred by governments, companies and private individuals worldwide. Governments and companies take on debt in order to make investments, build infrastructure or finance social programs. Private individuals borrow money to buy consumer goods, finance education or purchase real estate.

Debt usually carries interest. For example, you can also lend money to the Swiss government by buying Swiss government bonds. In return, you will receive a fixed interest rate every year and the borrowed money back at the agreed time. Switzerland is a country with a high credit rating. The probability that you will get your money back is therefore very high. However, for the low risk, you also get less interest than in countries that are less creditworthy.

In this way, countries can borrow money and incur debt. With private individuals, with companies or even with other countries. China, for example, is the country that has borrowed the most money worldwide.

Global debt is steadily increasing

Global debt has risen sharply in recent years. According to the Institute of International Finance, global debt exceeded the 300 trillion dollar mark in 2021.

There are many reasons for this sharp increase. In the last two years, the COVID-19 pandemic and the war in Ukraine were the main 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 private individuals to take on debt, as the cost of repaying the debt is lower.

Is high national debt a problem?

As long as debt and interest can be repaid, a high level of debt is not a problem. However, this requires income and a healthy economy. As soon as the economic engine falters or interest rates rise, high levels of debt can lead to difficulties. An economic recession or an increase in interest rates can make debt repayment more difficult and increase the financial burden on individuals, companies and governments. It is therefore important that debt is controlled and reduced in times of economic recovery to create financial resilience for any crises.

Governments may be forced to implement drastic austerity measures in order to reduce high levels of debt, for example. This can result in social unrest or a sharp slowdown in economic growth. Debt also always leads to dependency on lenders. This can restrict a country's sovereignty and ability to act. If a country is dependent on foreign lenders, these lenders can also exert political pressure or impose certain conditions on the granting of loans, which can impair the political and economic autonomy of the country in question. For this reason, it is important to have a sustainable debt policy that aims to keep debt at a sustainable 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. Rising interest rates in turn make loans more expensive. This cycle can become problematic for highly indebted countries. This is because when interest rates rise and borrowing costs increase, it becomes more difficult to repay the debt, especially if the economy is already weakened. This can lead to a negative spiral in which higher interest rates further increase debt and hinder economic recovery. It is therefore important that highly indebted countries keep an eye on their debt burden and develop strategies to stabilize their finances and reduce their dependence on expensive loans.

The worst-case scenario is a debt crisis. A country can then no longer meet its financial obligations. Domino effects that affect other countries or the entire global economy cannot be ruled out. Such a scenario occurred in 2009, for example, when Greece was on the verge of insolvency. At the time, the EU did everything it could to prevent Greece from going bankrupt.

Central banks, such as the Swiss National Bank (SNB), the European Central Bank (ECB) and the US Federal Reserve (Fed), must therefore carefully weigh up their interest rate decisions in order to ensure a stable economy and stable prices. A balancing act that is not always successful. If interest rates are raised too quickly or too sharply, this can stifle economic growth and lead to a recession. On the other hand, interest rates that are too low can fuel inflation and encourage bubbles on the financial markets. It is therefore important that central banks pursue a prudent and flexible monetary policy that responds to current economic conditions and challenges.

There are currently many voices that see considerable risks for the global economy in the current high level of global debt combined with rising interest rates. Could cryptocurrencies such as Bitcoin, Ethereum or Solana have come this far in a decentralized financial system?

In a decentralized financial system, all participants can interact directly with each other and borrow, lend or exchange digital assets. Anyone can become both a lender and a borrower. In such a system, it would be more difficult to take on large debts worldwide, as there would be no central lenders or financial markets. This would also lead to broader access to finance and reduce dependence on intermediaries such as banks and centralized players. In comparison, 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 the manipulation of even large markets. One such example is the LIBOR scandal that took place in the early 2010s, when some of the world's largest banks colluded on interest rates. In a decentralized financial system based on cryptocurrencies such as Bitcoin, Ethereum and others, this type of manipulation is made more difficult as transactions are transparent and publicly traceable.

In contrast to conventional currencies such as the US dollar, the euro or the Swiss franc, the maximum amount of some cryptocurrencies, such as Bitcoin, is limited. This means that only as many units can be borrowed as are available. This limited supply of cryptocurrencies such as Bitcoin, combined with a decentralized system without a central authority, helps to strengthen confidence in the currency and prevent potential inflation. In comparison, traditional currencies can be printed indefinitely, which can lead to currency devaluation and ultimately rising inflation. This difference makes cryptocurrencies such as Bitcoin an attractive option for those looking to protect themselves from the risks of inflation.

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