Howard Marks, the co-founder of US-based Oaktree Capital Management, became a billionaire by investing in distressed debt. When giving talks, Marks likes to ask this question: ‘What do you consider to have been the most important event in the financial world in recent decades?’

Some suggest the global financial crisis of 2008. Others say the bursting of the tech bubble in 2000. Some cite the pandemic stimulus. ‘No one cites my candidate: the 2,000-basis-point decline in interest rates between 1980 and 2020,’ Marks says.

Interest rates plunged after inflation was purged in the 1980s, an achievement that coincided with the liberalisation of financial markets and banking systems and an end of the debt aversion of earlier generations. The result? Record global debt.

World debt at the end of 2025 stood at US$348 trillion, the Institute of International Finance estimates. Company debt (financial and non-financial) was an unprecedented US$177 trillion. Government debt was at an all-time high of US$107 trillion, while households owed a record US$65 trillion.

Total debt equals about 308 per cent of world gross domestic product, estimates the global association of the finance industry, an increase from about 80 per cent of world GDP in 2000. (The record ratio is 362 per cent of global GDP. But this is an aberration set in 2021 when output slumped during the pandemic debt binge.)

At some point, the debt accumulation must stop. Yet there’s nothing to replace the debt-fuelled economic models that have fanned global growth in recent decades. Even if all outstanding debt were to be repaid in an orderly way, prosperity would be curtailed because it would mean consumers, companies and governments were trimming the spending and investment that propel economies.

Unmatched debt calls into question long-term financial stability, for surely not all will be repaid. A chunk is likely to be written off and a struggling world economy could host sovereign defaults, bankruptcies, housing crashes, banking traumas and exchange-rate crises. Such shocks could topple the global financial system, as nearly happened in 2008 when global debt was just 180 per cent of world output.

Record debt nowadays means policymakers have spent the ammunition they would need to protect economies and financial systems during any debt-induced strife. Stretched government debt ratios limit fiscal stimulus. Debt-ridden economies make it dicier for central banks to boost interest rates to tame inflation caused by the Iran war without triggering a financial crisis.

Officials can’t highlight the threat posed by record debt in case they spark panic and excessive repayments. If consumers and businesses rushed to sell financial assets to reduce debts, they could trigger an asset-price crash and put economies in a downward spiral. As shown during the eurozone financial crisis of 2009-2012, imposing fiscal austerity counterintuitively worsens debt ratios because economies (the denominator) generally shrink more than does debt (the numerator). This happens to a greater extent if austerity entrenches deflation, which boosts the real value of debt.

The worry is that the higher interest rates stemming from the Iran war could trigger the debt dénouement that appears inevitable.

What can authorities do other than dream that adequate economic growth and some inflation reduce debt burdens over time?

Policymakers could start by preventing the build-up of even more debt. One way to do this is to use capital controls and regulation to limit lending booms. Basel III, an international framework to set global standards on capital requirements in place since 2012, is such a step because it increases bank capital and liquidity requirements and seeks to tackle the pro-cyclical bias of financial systems. But countries such as the US and the UK are easing agreed Basel III demands that are due to be enacted, and banks are lobbying for the EU to do likewise.

Other areas policymakers could overhaul are the tax incentives that encourage borrowing. Two tax breaks stand out. One is tax deductions on mortgage repayments, which are allowed in about half of the advanced world (but not in Australia, which instead offers ‘negative gearing’ on investment properties). These subsidies steer lending towards homes rather than investment and thus lead to a mis-allocation of capital.

The other tax break is the deductibility of interest on corporate debt. This reduces the use of equity in financing companies; where equity is a less-crisis-prone way to fund investment.

There are risks, however, to removing these subsidies such as falling home prices. The vested interests opposing change are formidable, if not insurmountable, anyway. The higher interest rates are, the harder it is politically to curtail tax perks favouring debt.

Excessive government debt can be curbed in various ways. The most credible way would be to allow modest inflation to erode the real value of debt. Or governments could sell assets, cut spending and boost taxes and other charges. More sneakily, governments could use their legal might to squeeze money from their citizens, an option known as ‘financial repression’. Underhand ways to do this include laws that cap interest rates or laws that force citizens or managed funds to buy sovereign bonds.

Dodgier still would be use of accounting tricks. One would be to write off bonds held by central banks – do this, and some calculate that Japan’s government debt-to-GDP ratio would dive from a world-high 235 per cent of output to about 95 per cent. Or governments could default.

Indebted companies can try to boost revenue to repay debt faster, while indebted households can seek to earn more income to do likewise.

Such is some advice for helping an indebted world. But it’s unlikely to be enough to avert the crisis that must arrive one day. While that might sound pessimistic, be aware that no one can explain how this debt accumulation ends well.

Debt, to be sure, is the lifeblood of capitalism and is not a vice in itself. It’s just that there are limits. Bodies such as the IMF have lower estimates for global debt than the Institute of International Finance. But all show debt around record highs. The world has coped with excessive debt before – for instance, after the world wars. But only governments were awash in debt then and factors that promoted economic growth in those times such as free trade, growing young populations and pent-up demand are lacking today.

Fact is policymakers took interest rates too low and let debt balloon. The consequences will arrive when interest rates climb enough. The greater the debt, the lower is that breaking point.