Countries are piling on record amounts of debt amid COVID-19. Here's what that means

United States one dollar bills are curled and inspected during production at the Bureau of Engraving and Printing in Washington November 14, 2014.   REUTERS/Gary Cameron    (UNITED STATES - Tags: BUSINESS POLITICS) - GM1EABF07N501

A seemingly bottomless source of dollar bills; public debt is spiking in the US and beyond. Image: REUTERS/Gary Cameron

John Letzing
Digital Editor, World Economic Forum
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  • Public debt levels and deficits have hit records during the pandemic.
  • Many experts argue that it’s a sound means to fund a recovery.
  • Such borrowing has been further enabled and encouraged since the financial crisis.

When public debt in the US recently hit a peak unmatched since World War II, a funny thing happened: the public didn’t really seem to mind.

The debt load in the US has only continued to rise, far exceeding the size of the country’s economy as measures are enacted to cushion the impact of COVID-19. And the US is not alone – governments around the world have been borrowing heavily as they try to counter the pandemic. While this doesn’t necessarily come as a surprise, the relatively subdued reaction to it among conservative experts might.

The pandemic seems to be further reshaping how many people think about sizable public debt. Those who may have once been spooked by the concept seem to be okay with it now, if the money’s put to good use and the interest due remains relatively low.

So, even as the UK registers record debt, South Africa has to enact public-sector wage freezes that risk unrest, and the public debt-to-GDP ratio is expected to hit 140% in developed economies, many experts have a remarkable recommendation: keep borrowing

Not so long ago, it was received wisdom that a country’s public debt load should stay well shy of the size of its economy. In the US, public debt amounted to about 60% of GDP on the eve of the global financial crisis slightly more than a decade ago, and the European Union’s founding treaty actually spelled out a public debt cap of 60% of GDP. But like other things that may have once been taken for granted, the pandemic has (at least temporarily) scrapped that EU guideline – as policy-makers scramble.

In some ways, the growing willingness to ramp up borrowing is a result of a trick honed after the financial crisis; central banks have simply printed the money required to buy up massive amounts of government debt and inject liquidity into economies. Need to expand your deficit to fund COVID-19 relief? Just “print the damn money,” as one economist put it.

Image: World Economic Forum

Even long before COVID-19, some experts criticized what they saw as a single-minded obsession with curbing public debt as “foolish.” They noted that the sizeable debt raised in the US to help defeat the Nazis in World War II – presumably a justified expense during a crisis – had yet to be paid off long after the end of hostilities.

Still, rising debt levels create an opening for scaremongering about potential bankruptcy and ruin. And, the circular approach of having a central bank pump out money for public spending (justifiably) triggers warnings about resulting inflation. Germany, in the years after World War I – when hyperinflation got so bad that waiters had to call out new menu prices every half hour – is a frequently cited cautionary tale.

Yet, so far, inflation fears seem mostly muted.

Governments have been borrowing from a broad range of investors, including pension funds, but central banks have been some of their most reliable backers – the US Federal Reserve has been buying $80 billion in Treasury securities per month.

Of course, exploding public debt levels are expected to ultimately create serious financial challenges in many parts of the world.

Developing countries, for example, may be unable to tap the same financial resources as their wealthier peers – and they’ll likely soon be on the hook for billions of dollars in debt payments.

Image: The World Economic Forum

For more context, here are links to further reading from the World Economic Forum’s Strategic Intelligence platform:

  • South Korea recently unveiled a plan to legally limit public debt amid criticism from conservatives. But according to this report, there are also concerns about not spending enough to fight the pandemic, and questions about how urgently-needed such a cap really is. (The Diplomat)
  • This economics professor believes the UK government may be making a big mistake by letting its pandemic response be overly influenced by concerns about what a resulting deficit will mean for the future. (LSE)
  • A global debt crisis is not imminent, according to this analysis. While market watchers have good reason to sound the alarm about rising leverage worldwide, it should flatten out around 2023 – though that’s contingent on factors like a widely-available COVID-19 vaccine by mid-2021. (Project Syndicate)
  • When the European Central Bank committed to a €1.35 trillion asset purchase program to cushion the blow of COVID-19 earlier this year, it brought to the surface a deep-seated disagreement in its governing council. This analysis examines the political conflicts always liable to break out at the ECB, and what drives them. (LSE)
  • The pandemic has triggered concern about debt unsustainability in many countries. But the issue of sovereign debt transparency has been a thorny one – this analysis proposes the establishment of an open-access, real-time debt transparency platform powered by distributed ledger technology. (CEPS)
  • Low-income nations were due to send at least $40 billion to lending banks and bondholders this year, and plans to pause these interest payments – let alone cancel any of the principal – are now patchy, according to this report. (The New Humanitarian)
  • Economists might be untroubled by heavy government borrowing when the US economy is in peril, but according to this report, Republican lawmakers have grown skittish at the enormous costs of battling the pandemic. (Christian Science Monitor)

On the Strategic Intelligence platform, you can find feeds of expert analysis related to COVID-19, Financial and Monetary Systems and hundreds of additional topics. You’ll need to register to view.

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