“To paraphrase Mr Micawber: ‘Annual income $3,420bn, annual expenditure, $6,552bn, result misery!’” says Peter Warburton in the Halkin Letter. The Biden administration’s $1.9trn spending proposal is another milestone in America’s long march away from “fiscal responsibility”.
Average global public debt will hit 99.5% of GDP this year, according to the International Monetary Fund. The pandemic cost world governments some $14trn in fiscal support last year. In advanced economies government deficits averaged more than 13% of GDP in 2020. Average public debt across the rich world will climb from 104.8% in 2019 to 124.9% this year. In the UK, public debt currently stands at £2.11trn and is on course to exceed 100% of GDP.
The government will borrow eight times more this fiscal year than it did in 2019, says Liam Halligan in The Daily Telegraph. Debt doves say that we shouldn’t worry since the government can borrow so cheaply. But low gilt yields are not due to a market judgement that the UK is a good credit risk. Instead, they reflect the fact that “the Bank of England is hoovering up government paper” with printed money. The Bank’s pile has almost doubled since the pandemic began. Before too long it could “own half of the outstanding gilt stock – an astonishing state of affairs”.
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Biden’s big bazooka
Meanwhile in America, “Sheriff Joe may be going too big”, writes Irwin Stelzer in The Sunday Times. The President remains deeply marked by the long, slow recovery from the financial crisis that he witnessed as Barack Obama’s deputy.
But the pandemic is a very different beast from the Great Recession. House prices plunged by 30% after 2008; today they are up by 13%. Lending froze up in 2008; today America is “awash in cheap credit”. Even some of Biden’s allies are expressing concern, notes Felix Salmon for Axios. Former Treasury secretary Larry Summers is worried that the stimulus plan will overwhelm the economy’s supply capacity, triggering “demand-pull inflation”.
Ballooning deficits will increase the temptation of governments to adopt some form of Modern Monetary Theory (MMT), the notion that the state can pay for spending by simply “monetising the deficit” (ie, printing money). MMT, which teaches that inflation – not borrowing – is the only major constraint on government spending, remains highly controversial but seems to be gaining ground.
As economist and MMT advocate Stephanie Kelton recently noted, whether you think Biden’s stimulus plan is too big or not, “at least we are [focusing on] inflation risk and not talking about running out of money. The terms of the debate have shifted.” Like it or not, we are all going a little bit MMT.
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