Quite how much new debt has been created as governments have responded to the coronavirus crisis remains an open question. But it’s a lot.
Stimulus packages are now routinely running in the high hundreds of billions of dollars or, in the case of the US and Japan, trillions. The European Union is pumping an additional US$800bn or so into the Eurozone economies, and the UK has been out in the bond markets in force, securing amongst a plethora of other debt instruments, its first ever negative-yielding bond.
The immediate arguments in favour of all this new debt run along two familiar grooves. The first is that with economies the world over continuing to crater in the face of coronavirus lockdowns and their aftereffects, some form of relief is required just to keep businesses, and their associated supply chains, alive.
The second, more nebulous argument, is that with interest rates so low, there has never been a better time for governments to borrow. With debt so cheap, it’s a buyer’s market.
The first argument is the safer of the two. It’s been economic orthodoxy on several sides of the aisle since the time of the Great Depression in the 1930s - when several different responses were tried in succession - that stimulus is the appropriate response to economic emergency.
That it took the conflagration of a global conflict erupting ten years later to pull the world out of the depression once and for all is often overlooked because enough of a recovery was already evident before the war to grant the victory to Keynes and his followers.
He it was who played a central role in the crafting of the Bretton-Woods agreement that underpinned the post-war economic order, and it’s perhaps no coincidence that the unprecedented growth experienced by the Western world following the war came to an end at around the same time that Bretton Woods did.
That’s another argument, though. The key point is that following the great depression and the war, there was not only stimulus, but growth.
Growth meant that there was money in taxpayers’ pockets so they didn’t grumble too much about the debt burden left over from the stimulus. It also allowed for the gradual erosion of that debt by inflation without causing voters to be left out of pocket in real terms.
This time round the situation is likely to be very different.
The productivity gains delivered by US manufacturing in the post-war era aren’t likely to be repeated in the 21st century. If there’s anything at all similar coming it’s likely to be delivered by robots, as advanced economies increasingly embrace automation. And if that’s the case, voters themselves aren’t likely to be better off at all, which in turn is going to render them less willing to fork out the taxes required to pay for any new debts.
In the near term that may not be too important, because with rates so low, governments looking ahead will feel that they ought to be able to refinance without any difficulty. And with central banks creating so much of the new debt by printing money, governments are for now at least able to exert a strong physical and moral downward pressure on interest rates.
But, there are risks. One is inflation. What if, with all this new money around, the world’s economic actors wake up to the fact that it’s worth less than it used to be. After all, what’s a dollar worth if everyone’s got one, and if governments just print trillions more when times are difficult? It’s helpful for now that the dollar is the world’s reserve currency, but as the century progresses it will have challengers – no prizes for guessing that China is waiting in the wings, but there’s also India and the Eurozone to think about.
What if the threat or actuality of inflation prevents governments printing new money to roll over old debts? The international bond markets may not prove as forgiving as tame central bankers in setting rates.
Some commentators reckon that a rise in rates to just 2% will stretch several governments beyond their means and put them at risk of default on their interest payments. The UK government has never defaulted, but there’s always a first time. The US hasn’t defaulted since the time of Alexander Hamilton, but the perennial renegotiation of the debt ceiling between various factions in Congress means it’s always a real possibility.
The more growth there is, the more this threat recedes, as governments can tax both directly and indirectly. But what if there isn’t growth? What if it’s all sucked away by the magic money tree, also known as modern monetary theory, or MMT? Under this scenario there’s a constant supply of new money, so no one ever really runs out, but at the same time it’s hard believe that profits or incomes are really meaningful when they can constantly be diluted by central governments.
It’s a conundrum that may in fact only be the latest veneer on a theme that has been prevalent in global economics for more than two decades now: the growth of China. Noteworthy this week were new global economic forecasts that showed major economies like the US, the UK and France tipping into negative growth of as much as 10% this year, while China’s growth is projected at 1%.
To still be in growth amidst such headwinds is a stunning achievement, and whatever the rights and wrongs of the Wuhan virus propaganda, if China is able to deliver sustained growth to cover its increased debt burden it will be better positioned economically than its nearest rivals. And for years to come.