DEBT is the "vital air of modern commerce". Those words were spoken by Daniel Webster, an American senator, in 1834, when America’s bond market was still in its nappies. Today the world is crippled by too much debt.</strong> The borrowings of global households, governments, companies and financial firms have risen from 246% of GDP in 2000 to 286% today. Since the financial crisis began in 2007, debt-to-GDP has risen in 41 of 47 big economies tracked by McKinsey,</strong> a consultancy firm. For every extra dollar of output the world cranks out more than a dollar of debt. Beyond a certain point an ever thicker mesh of debt contracts is bad for growth, making firms and households vulnerable to shocks and disruptive defaults.</strong> So why is the world addicted to borrowing?
The lust for debt has two underlying causes. The tax system gives perks to borrowing.</strong> Interest payments on mortgages are tax deductible in about half of rich countries and some emerging ones, for example India. And around the world firms can deduct interest costs against their taxable profit.</strong> That creates an incentive to issue debt instead of equity</strong> (for example shares). Only a quarter of the world’s stock of assets is now comprised of shares, which are far more flexible than debt because dividend payments to investors can be cut without causing a default. The other underlying cause is the wiring in humans’ brains. People over-estimate the safety of the fixed payments that debt offers: like a corset it masks nature’s wobbles.</strong> They also tend to think asset prices, particularly of houses, will rise. Using debt to buy rising assets boost profits.