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Global Debt: A Growing Menace Sean Holiday Mr. Holiday AP Macroeconomics 1 June 2015 “Rising global debt is increasing the risk of another financial crisis” Los Angeles Times Don Lee 29 July 2015 “More debt in the form of government and private spending is needed to stimulate today's sluggish economies. Yet the higher the debt, the greater the danger that a pullback by creditors will trigger another financial crisis like the one in 2008.” Source: Roscoe, Mike. “What does $200 trillion off debt really mean for the global economy?” Positive Money.3 Feb. 2015. Web. 12 May 2016. Keynesian Approach “More debt in the form of government and private spending is needed to stimulate today's sluggish economies….Europe has largely slashed spending to get a control on government budgets, but the result so far has been minimal growth and high unemployment….” The Loanable Funds Market “The result is that by the middle of last year, total global debt — government, corporate and household — reached $199 trillion, an increase of $57 trillion from the end of 2007.” The Money Market “In recent years governments have financed spending by selling and buying trillions of dollars of bonds. That's helped to hold down interest rates, fueling more borrowing…Waves of sovereign default have started with movements in interest rates.” Key Points • Government borrowing in the loanable funds market has resulted in rising real interest rates • European governments have been able to offset this by issuing and buying bonds in the open market, leading to falling nominal interest rates (in the money market). • That encourages more borrowing, and interest rate volatility, raising the risk of default. • This has combined to result in a situation where real economic growth isn’t occurring. • This trend could be reversed by focusing spending on engines of economic growth, like education, health care, and capital formation.