Unveiling the Dynamics of Modern Finance: Examining Debt, Interest Rates, and Technological Advancements

Welcome to an intriguing exploration of the ever-evolving world of finance. In this article, we delve into the fascinating realms of global debt, interest rates, and the transformative impact of technology. Join me as I navigate through these crucial topics, shedding light on their implications for individuals, businesses, and the global economy. Get ready to gain valuable insights that will challenge your perspective and spark engaging conversations. There is no right or wrong here, just a reflection of what is happening around the world today. These are my perspectives on the environment, and I would love to know your thoughts as well, as every viewpoint contributes to our global trajectory. So, sit back, relax, and walk through the intricacies of our financial landscape.

Global Debt

Let’s start with the most talked-about topic – debt. Debt has always intrigued me, especially considering that global debt in 2021 reached 247% of the global GDP. In theory, this means that we are in a global debt bubble. The term “debt bubble” may instill fear in many, as they imagine a looming collapse. However, that’s not entirely true. Economies worldwide will always find ways to manage and trade this debt, continuously paying off a portion of it using the generated GDP. In practice, this debt-to-GDP ratio may not have significant implications. Nonetheless, as finance enthusiasts, it is crucial for us to be aware of our standing. Yesterday, the US government passed a bill to increase its borrowing limit, avoiding a US debt default that could trigger a global financial crisis, as we have seen in the past. This move, at least on paper, contributes to the global debt. However, whether the GDP will increase in the same proportion as the debt remains to be seen. Thus, on a global scale, we continue to accumulate debt, albeit gradually. This accumulation does not have a direct impact until trades are executed, people have jobs, and money is circulating. Many developing and underdeveloped economies also function in a “deficit,” where their borrowings exceed their GDP. The rationale here is that the debt has a recovery potential, given that these countries are high-growth economies. Eventually, they will generate GDP at a rate higher than their borrowings, thus repaying the debt. So, in a sense, could we say that globally, we are a developing or underdeveloped world? With innovations such as AI and space technologies, it seems fair to claim that the world is continually developing, which could justify the debt-to-GDP ratio globally.

Figure shows global public and private debt as a % of GDP (Source: IMF)

Interest rates

Now, let’s move on to the second most discussed topic – interest rates. Interest rates have a profound impact on the global economy, and one aspect that can be boiled down to is affordability. Interest rates determine how much individuals and financial institutions can save, borrow, and invest. Since the 2008 financial crisis, interest rates have remained exceptionally low, creating a sense of comfort worldwide. Cheap debt resulted in increased spending and investment, leading to higher GDP. Leveraged buyouts (LBOs) flourished because debt became a cheaper source of funding. However, in 2022, when inflation became a concern, interest rates were raised as a remedy. The shock to the system occurred due to denial, lack of preparedness, and an inability to adjust. The reduction of rates post-2008 was clear in its purpose – reviving the global economy. To achieve this, basic economic principles were applied, and quantitative easing was adopted. Yet, we know that economies and monetary policies go through cycles. With the global economy peaking between 2017 and 2019, it was an opportune time to normalize monetary policies and move away from quantitative easing. Perhaps a slow, gradual increase in rates would have been more easily adopted and adjusted to. However, as far as I recall, the move away from easing was met with resistance from the stock markets, and thus, rates never truly “corrected.” Then, COVID-19 struck, demanding further easing, exacerbating the situation. Finally, the Ukraine war made a rate hike inevitable, and despite market reactions, governments have to take the necessary steps to maintain sustainable economies and keep the economic cycle smooth. High interest rates have impacted numerous businesses, private equity houses, and even ordinary people. The common population is particularly affected, as the cost of living rises faster than wage increases. This certainly indicates a slowdown, but it is a significant one because it has accumulated over the years instead of being smoothed out over the last 4-5 years. There is nothing inherently wrong with all of this because, as a governing body, authorities must make decisions that are in the best interest of society in the long term. However, how long will it take for individuals and companies to adjust to this new high-rate environment? High interest rates are not unprecedented, as we have witnessed higher rates before the 2008 crisis. Even after 2008, many countries like India had rates ranging from 5% to 15%, depending on their stage of development. Yet, these rates did not hinder the development of those countries. It’s about taking the bitter sip first and then modifying the way businesses are conducted or finances are managed. This does not imply that interest rates will remain high forever. Nevertheless, now that the world has experienced a variety of challenging scenarios, it is ideal for businesses and individuals to have contingency plans for tough times. How everyone adapts to this new reality is an ongoing story, but undeniably an intriguing one, as we all contribute to the narrative through our actions to some extent.

ECB historical interest rates shown above (source: trading economics)
US Fed funds rates shown above (source: trading economics)
RBI interest rates shown above (source: trading economics)

Technological developments

Lastly, let’s touch on AI and other technological developments. The rapid expansion of AI in recent times is remarkable, and in the case of cryptocurrencies, regulators must step in to protect investors. While these technologies add great value to our workplaces, it is important to consider their impact on the existing workforce. Many argue that AI will replace numerous jobs, but that is not entirely true. By shifting and enhancing certain skills, and by focusing on tasks beyond recurring processes, individuals can work alongside AI technologies. This presents a challenge, and regulators will ultimately play a major role in ensuring responsible AI use and helping the workforce develop the right skills to avoid redundancy. These technological developments offer benefits in various ways. For example, blockchain technology, used in the crypto world, optimizes many processes. Cryptocurrencies have facilitated quicker international fund transfers. AI has improved data accuracy, reliability, and enhanced analytics. These aspects are crucial for businesses to maximize revenue and reduce costs, including labor expenses. Moreover, they enhance user experiences. However, the real cost lies in the unemployed labor force that cannot contribute to GDP, leading to a mismatch. This situation resembles that of the industrial revolution, where excess goods were produced, but either people couldn’t afford to purchase them or there just weren’t enough people to purchase the whole batch. Although an extreme scenario, it is unlikely to occur. Nevertheless, regulators must remain vigilant, in case technologies are adopted faster than anticipated.

Total Cryptocurrency Market Cap shown above (source: coin market cap)

Concluding thoughts

In conclusion, as we navigate the intricate web of global finance, several key narratives emerge that demand our attention. Debt, interest rates, and technological advancements are reshaping the world we live in, offering both opportunities and challenges.

The staggering levels of global debt may seem alarming, but it’s essential to understand the complexities surrounding it. While the debt-to-GDP ratio continues to rise, economies find ways to trade and manage this debt, ensuring its movement and gradual repayment. Moreover, the concept of “developing” or “underdeveloped” economies suggests that growth potential justifies borrowing, implying that the world as a whole is in a perpetual state of development.

Interest rates play a crucial role in shaping economic dynamics. The period of low rates following the 2008 crisis led to increased spending and investment, fueling economic growth. However, the recent increase in interest rates has created challenges, requiring individuals and businesses to adapt to a new high-rate environment. While adjustment may be challenging, history has shown that countries can continue to develop even with higher interest rates. The key lies in taking the necessary steps to modify our approach to business and finance, acknowledging that this new reality is part of a cyclical economic pattern.

Technological advancements, particularly in AI, bring immense value to our lives and workplaces. However, they also pose concerns about job displacement. The collaboration between humans and AI, coupled with skill enhancement, can mitigate the negative impacts. Regulators must play a vital role in ensuring responsible AI use and helping the workforce acquire the necessary skills to stay relevant in a rapidly changing landscape.

Amidst these narratives, we find ourselves in a time of vulnerability and opportunity. Market sensitivity reflects the lack of investor confidence, yet when we zoom out, we discover a world brimming with potential. It is a time of opportunity for astute investors, a time to capitalize on lower rates, plan for retirement, and learn valuable lessons for the future.

As we move forward, sharing perspectives and engaging in dialogue become paramount. By collectively interpreting these broad topics, we can gain valuable insights that inform our investment decisions and shape the path we take as financiers or retail investors. Together, let us embrace the challenges and opportunities that lie ahead, and chart a course towards a more prosperous and sustainable financial future.

In the end, it is not only about our individual actions but also about our collective contribution to a story that continues to unfold. Let us be curious, adaptable, and open-minded as we navigate the complexities of finance, for it is through our collective wisdom that we can forge a path towards a brighter economic landscape.

Disclaimer: The views and opinions expressed in this article are solely those of the author and do not constitute financial advice or recommendations. The information provided is for educational and informational purposes only. Readers are encouraged to conduct further research and consult with a qualified financial professional before making any investment or financial decisions. The author shall not be held responsible for any actions taken based on the information presented in this article.
MSc Finance graduate from the London School of Economics and Political Science (LSE)
Avatar for Ria Vaghela

Ria V Vaghela is an M&A Executive at RSM UK and an MSc Finance graduate from the London School of Economics and Political Science (LSE). She has worked at Jefferies, Dial Partners and 7i Capital prior to RSM UK gaining an experience of about 1.5 years. She has also worked as an Editor and Content Writer for The Representative Media. Apart from finance, she is interested in reading books on psychology and economics and also likes to paint and play lawn tennis

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