The idea that governments might have borrowed more when interest rates are the lowest in a century is not that surprising
Huge global debt not necessarily a major headache
Global debt has never been higher, the IMF said last week, urging countries to take advantage of current strong GDP growth rates and reduce it before economic and financial stability come under serious threat.
Certainly, some of the figures in the IMF's latest fiscal report were eye-catching: debt at the end of 2016 was $164 trillion, or 225 per cent of global GDP; almost half of the rise since 2007 has come from China alone; government debt-to-GDP in advanced economies has only ever been higher once in history, around the time of the Second World War.
And in a world of sub-par inflation and weak wage growth, higher nominal debt on both national and individual levels is a potential worry because the real value of that debt continues to rise.
"There is no room for complacency," the IMF warned.
But there are reasons why this warning may ring hollow.
Firstly, an increase in borrowing and credit to revive the world economy following the financial crisis is exactly what the IMF and global financial authorities wanted.
Interest rates have been floored at zero for a decade, central banks have pumped over $10tn of QE into the global financial system and governments have unleashed a tsunami of fiscal stimulus not seen since for decades.
Strong medicine, no doubt, but it was needed. And it worked. By and large, the world financial system is stronger now than it was in 2007, the world economy is posting its strongest synchronised growth since 2011, and inflation remains conspicuous by its absence.
For several years post-2008, a lack of demand for credit was policymakers' biggest big fear. Surely now, therefore, higher borrowing reflects a welcome increase in confidence among individuals and companies.
Rising debt is, in itself, not necessarily a bad thing.
Conservative orthodoxy holds that borrowing must be kept in check so future generations don't pay for the excesses of today, to avoid currency debasement, and prevent inflation from exploding.
But companies and governments need to borrow to expand and support growth. As Charlie Robertson at Renaissance Capital notes, most of the increase has been in the public sector. And of the growth in private sector borrowing, China accounts for 75 per cent.
He said the idea that governments might have borrowed more when interest rates are the lowest in a century is not that surprising. What is more interesting is why in so many countries, the private sector has not borrowed more, and when might that change.
Countries that borrow in their own currency are inured from exchange rate risk and imported inflation. Japan has long had the highest debt-to-GDP ratio in the world, but its bond yields and interest rates have long been the lowest in the world.
Even Italy, albeit backed by European Central Bank QE, has historically low borrowing costs despite shouldering the second-largest debt load in the world.
Of course, emerging market countries are different. They often borrow in dollars and so are exposed to fluctuations in exchange rates, US interest rates and Treasury bond yields.
And the borrowing binge over the past decade has been led by emerging markets. China alone has accounted for 43 per cent of the increase in global debt since 2007, or $21tn.
In the case of China, the growth in private sector debt has been an increasing tail risk for investors. The fear is this bubble bursts and the fallout spreads to the rest of the world.
But despite periodic scares in recent years, this hasn't happened. Many analysts say China's FX reserves of more than $3tn are a sufficiently large rainy day fund to ensure private sector debt poses little threat to the economy at large.
At the end of 2007, global FX reserves stood at $6.7tn. Central banks' FX reserves now are more than $11tn, the bulk of which is held by emerging market countries. That's a pretty big cushion.
Finally, global interest rates and bond yields may not rise much further from current levels. The historically long US economic expansion may not have much further to run, and parts of the US money market and swaps curves show investors now expect the Fed to start cutting rates in 2020.
The US bond yield curve is the flattest in over a decade, which gives credence to the view that a slowdown is looming. History shows that should the curve invert, recession will follow.
The 10-year US Treasury yield has been stuck below 3 per cent for seven years. While it could break above at any time there's little to suggest it will go too much higher, far less for a sustained period of time.
Few people anticipate a 4 per cent handle.