- Public debt levels and deficits have hit records during the pandemic.
- Many experts argue it’s a sound means to fund the recovery.
- Such borrowing has been further enabled and encouraged since the financial crisis due to central bank efforts.
As public debt in the US recently hit a peak not reached 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. The US is not alone – governments around the world have been borrowing heavily as they seek to counter the pandemic. While this doesn’t necessarily come as a surprise, the relatively subdued reaction 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 countries like the UK register record debt, some like South Africa have 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 general 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 to prop up economies.
In some ways, the growing willingness to ramp up borrowing is a result of a trick honed since the financial crisis. Just as they did then, 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.
Long before COVID-19, many experts were criticizing the single-minded obsession with curbing public debt as “foolish,” while noting that debt raised to defeat the Nazis in World War II – presumably a justified expense during a crisis – had yet to be paid off.
Still, rising debt levels risk scaremongering about potential bankruptcy and ruin. And, the circular approach of having a central bank pump out money for public spending triggers warnings about resulting inflation. Germany after World War I, where hyperinflation got so bad waiters had to call out new menu prices every half hour, is a frequently-cited example. Yet, 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, record public debt levels are expected to create financial challenges in many parts of the world. Developing countries, for example, may be unable to tap the same resources as their wealthier peers – and they’ll likely soon be on the hook for billions of dollars in debt payments.