The world is drowning in debt
Covid-19 cost world governments some $14trn in fiscal support last year, and this year average global public debt will hit 99.5% of GDP.
“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”.
MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
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.
Get the latest financial news, insights and expert analysis from our award-winning MoneyWeek team, to help you understand what really matters when it comes to your finances.
Alex is an investment writer who has been contributing to MoneyWeek since 2015. He has been the magazine’s markets editor since 2019.
Alex has a passion for demystifying the often arcane world of finance for a general readership. While financial media tends to focus compulsively on the latest trend, the best opportunities can lie forgotten elsewhere.
He is especially interested in European equities – where his fluent French helps him to cover the continent’s largest bourse – and emerging markets, where his experience living in Beijing, and conversational Chinese, prove useful.
Hailing from Leeds, he studied Philosophy, Politics and Economics at the University of Oxford. He also holds a Master of Public Health from the University of Manchester.
-
Higher earners face £377 bill if Reeves puts up income tax – do you fit the Treasury’s definition of ‘working people’?Labour’s election manifesto pledged not to raise National Insurance, VAT or income tax but prime minister Keir Starmer appeared reluctant to repeat the promise this week
-
Ofgem could write off £500 million of energy debt for 195,000 households – would you be eligible?Energy debt costs the average billpayer on the Ofgem price cap £52 a year.
-
Yoshiaki Murakami: Japan’s original corporate raiderThe originator of Japanese activism, Yoshiaki Murakami, was disgraced by an insider-trading scandal in 2006. Now, he's back, shaking things up
-
Galliford Try has firm foundations for strong growthBuilder Galliford Try has a finger in a wide range of pies, notably important work in the public sector
-
Card Factory is a stand-out small-cap going cheapIn a digital world, we still value the personal touch. That’s good news for Card Factory, whose unique business model is suited to weather all economic storms
-
How much gold does China have – and how to cash inChina's gold reserves are vastly understated, says Dominic Frisby. So hold gold, overbought or not
-
Debasing Wall Street's new debasement trade ideaThe debasement trade is a catchy and plausible idea, but there’s no sign that markets are alarmed, says Cris Sholto Heaton
-
Europe’s new single stock market is no panaceaOpinion It is hard to see how a single European stock exchange will fix anything. Friedrich Merz is trying his hand at a failed strategy, says Matthew Lynn
-
Should UK schools ban smartphones?The effects of smartphones on young minds are disturbing, with calls for politicians to make school smartphone bans mandatory. Is radical action needed?
-
Are venture-capital trusts worth investing in?Venture-capital trusts are a tax-efficient way to invest in early-stage companies. But are they worth the risk?