Public Debt: how much is too much? | The Economist

The covert '19 pandemic has forced governments around the world to borrow and spend at an almost unprecedented rate between April and June. The United States alone has borrowed $3 trillion, the largest amount borrowed in a single quarter since records began. The increase in

public

debt

is unlike anything else. As we have seen in recent history,

economist

s have warned against high levels of

debt

in the past, but new ideas suggest that

much

higher levels of debt could now be sustainable. The fact that there has been such a dramatic shift in consensus makes some people nervous about how

much

of the world's growing

public

debt should be the fact that governments have borrowed money to finance their spending. for hundreds of years at the end of the Napoleonic Wars in 1815.

Britain's debt was 164 percent of GDP and after World War II it was even higher, at 259 percent. Percent of GDP Historically, governments have borrowed for several main reasons, probably the most important being to fight wars, but over the last 100 years or so, governments have increasingly used their debt as a way to try to maintain the economy on the right track to raise money issued by governments. bonds for investors these are in effect bonds that are repaid over a fixed period with interest at a rate that depends on the duration of the bond how desirable these bonds are for investors depends on the creditworthiness of the country they tend to be very safe assets with governments You can usually count on getting your money back once the government has sold a bond on the market;

It can be redeemed and traded as many times as people want and that gives you an idea of ​​how the markets view the creditworthiness of the bond. Government Government bonds are purchased by many different investors, including pension funds, hedge funds, banks and individual investors, as well as a country's own central bank and local government. Foreign governments also buy bonds. The largest foreign holders of US public debt are China and Japan, if you have a safe asset that everyone will accept, like we do, government bonds, you can sell those bonds in a crisis, get dollars and then use them to make sure not get into trouble, so there are many potential buyers of government bonds and they could really end up all over the world The willingness of governments to issue bonds and increase public debt has changed over time after the sky-high debts of the During World War II, many governments feared they would continue to fall into the red, but they continued to go into debt and in the 1970s this was blamed for high inflation.

Many

economist

s have spoken to governments and said that the reason you are facing these high inflation rates is because you are taking on so much debt that you are adding too much money to the economy for the economy to absorb it easily and it is the rise in prices that It really marked the beginning of a sea change in the way governments think about debt and therefore the use of borrowing as a macroeconomic tool slowly petered out until we hit the global financial crisis. Now it's official, we are in a recession. The main financial institutions. have been on the verge of collapse and some have failed in the rich world the financial crisis raised public debt from 74 to around 105 in the decade after the financial crisis and in emerging economies it increased from approximately 35 to 48 of gdp this growing Debt caused political panic with some governments applying strict austerity to try to reduce their budget deficits over the following decade, but it didn't quite go as planned around 2014.

The lessons of that experiment began to become quite clear and what we learned It was austerity. in a time of economic weakness it damages economies so much that it is basically of no use the economy becomes so weak that there is not enough tax revenue to make it worthwhile these problems with austerity led to a new way of thinking in 2019 The IMF chief economist Olivier Blanchard gave a groundbreaking speech in which he argued that governments could borrow much more than previously believed. I think the fact that there was such a dramatic change in consensus makes some people nervous, but at the same time it wasn't rushed.

The decision they made was heavily influenced by what was happening in the world around them. Blanchard noted that interest rates on government bonds had been falling, making it cheap for some governments to borrow money at the same time as the economy was growing. Let's take the United States the nominal rate. GDP growth, which is GDP before adjusting for inflation, has generally been higher than interest rates over the past 30 years, this is important because as long as GDP grows faster than the country's debt is accruing interest and governments keep additional borrowing under control, then a nation can effectively get out of debt at no fiscal cost, mathematically it is a very simple point, but when you explain this to governments and tell them that this is how it works, That ends up being a pretty powerful thing not even a year after Blanchard gave her opinion.

The coronavirus emerged in Wuhan and began the largest public debt exercise in generations. Government borrowing reached a record 55 billion pounds. Public debt borrowing is around 300 billion or 16 of GDP, but not all countries can borrow to overcome the pandemic. Almost all governments have discovered that it is easier to borrow now than it was 30 or 40 years ago, but the difference between a rich country and a poorer country that does not have a long history of borrowing in foreign markets, those places cannot obtain the same interest rates, is a source of significant inequality in terms of how countries deal with this pandemic, that some places can borrow almost as much as they want to support their economies and others can borrow on this scale is not without risks For anyone who owes us a lot of money, as there are always threats that interest rates could rise again Economists aren't entirely sure why these rates have been low for so long Overall mortgage interest rates government bonds or savings accounts are demand driven if the desire to save is high then interest rates will rise low as banks or governments issuing bonds do not have to tempt investors with favorable rates, There are several factors driving the desire to save, which could be keeping interest rates low.

The aging of the population could be one of the causes, as people tend to save for retirement funds and pensions. over government bonds and fear of global financial instability can also play a role in causing investors to look for safe assets like bonds, we can't be completely sure why exactly it happened and that's important because if you can't be sure why it happened in the first place you can't say for sure that it won't reverse at some point in the future, which would be a big problem, you know, if interest rates suddenly skyrocketed, then all the countries that had accumulated a large amount of debt they would suddenly be in very big trouble despite these risks, the pandemic has left many countries with no choice but to continue borrowing to reduce deficit spending now, while the global economy is still paralyzed by the pandemic , would cause lasting damage, but it is not known how much and for how long countries can continue to go into debt.

It is not clear and the colossal debt accumulated in the last six months will be one of the greatest legacies of the pandemic. I'm ryan avent, economics columnist for the economist. We have written a series of articles covering the basics of a variety of economic topics. topics and how the latest ideas about them are evolving. You can read more in the link next to it. Thanks for following you.