MS $40T of Debt Brake or Break

M August 23, 2026 07:08 06:00 AM AM GMT GMT

Sunday Start | What's Next in Global Macro Global Idea

Morgan Stanley & Co. International plc+

Early in the last decade it was all people could talk about. On the heels of the GFC and the response required to contain it, markets turned their attention to the threat of government debt. Research reports, TV and conferences abounded with charts of rising debt/GDP and stern warnings of the consequences. It was the issue that would shape our financial future, and what a bleak future it was: high debt, low growth, and grinding austerity as far as the eye could see.

The dire predictions of that period did not materialize. Global growth was fine. Investment expanded and capital deepened, thwarting concerns of ‘secular stagnation’. DM equities and currencies were the great beneficiaries (refuting the conventional wisdom at the time).

And the concern about rising debt? A distant memory. In its first 240 years the United States accumulated ~$20T of Federal debt. It has borrowed another $20T in the last ten.

Comparing this debt to the size of the economy is more appropriate. It doesn’t Morgan Stanley does and seeks to do business with companies covered in Morgan Stanley Research. As a result, change the story. Over the last decade, government debt/GDP has risen across the investors should be aware that the firm may have a conflict of world’s most important economies. Outside of the UK (yes, that UK), deficits are not interest that could affect the objectivity of Morgan Stanley Research. Investors should consider Morgan Stanley expected to narrow ( Exhibit 1 ). Research as only a single factor in making their investment decision. Global fiscal policy is clearly supportive. But as yields rise, is there a point where For analyst certification and other important disclosures, refer to the Disclosure Section, located at the end of this this debt acts as a ‘brake’ on corporate and household activity, or worse, ‘breaks’ report. the current market calm? += Analysts employed by non-U.S. affiliates are not registered with FINRA, may not be associated persons of the member As a ‘brake’ on corporate and household activity, the bar is high. Worsening debt/ and may not be subject to FINRA restrictions on communications with a subject company, public appearances GDP in the public sector has, in many cases, mirrored improving trends in corporate and trading securities held by a research analyst account.

and household balance sheets ( Exhibit 2 ). While this isn’t surprising (add in the trade balance, and it’s an accounting identity), it's still important.

Start with corporates. Issuance is booming on the back of a surge in technology spending and normalizing M&A volumes (see last week's Start). Our credit strategy team continues to forecast record issuance this year.

Yet, we think this debt can still be absorbed with only modest spread widening. The starting point for balance sheets is good: US corporate debt/GDP that is unchanged over the last decade and lower since COVID. Coupled with low hyperscaler leverage and high AI ROIC that can justify ‘paying up’, don't expect yields to stop this historic financing wave.

The household sector has even more debt, yet looks even better. US household debt/GDP (~67%) is lower than it was in 2000 (~70%) and 6pp better than 2019 (74%). And if anything, that may overstate things; much of that debt is in mortgages struck at historically low rates, while the asset side of household balance sheets has improved substantially.

This strong aggregate does hide dispersion between the top and the bottom. But for overall spending, the aggregate matters, helping to explain why consumer spending has held up so well despite higher rates and energy prices. Like corporates, we shouldn’t count on households to react quickly to the rate move, especially when rate-sensitive sectors, like housing, are already depressed.

Our examples have been American but these trends are global. Europe has seen higher government debt/GDP balanced by (even more) corporate and household deleveraging. In Japan, public borrowing is up while private-sector leverage is stable.

To a great degree, this reflects a policy…