Covid: World Drowning in Debt
The US economy grew by 4% annualized in the fourth quarter. This followed a 33.4% expansion in the third. A sleeper amidst the stream of positive statistics is that the growth was accompanied by a surge in debt.
First, for some statistics to think about. The Institute of International Finance estimates that global debt increased by $20 Trillion last year to $277 Trillion, equivalent to 365% of global gross domestic product. As borrowing increased to finance covid-related stimulus payments, US federal government debt has surged to 133% of GDP, up from an already high 109% a year ago.
To digress a little, I learned when I started my career studying country risk four decades ago that 50% was the safe maximum!
Why is the debt increase so bad? Unless a debtor files for bankruptcy or a restructuring, principal and interest need to be paid when due. That, in turn, means that there would be less to consume or invest in the future. While an increase in debt at a country level can be justified as necessary to smooth out fluctuations in economic cycles as well as to increase future productive capacity, a surge in borrowing merely to sustain current living standards can only end up in tears. What is true for individuals holds for countries as well.
Another negative facet of increased reliance on debt is intergenerational. When the repayment is due over long periods of time — say, 30 years — it is left to the succeeding generations to service the obligations. In other words, it would be our children’s and grandchildren’s lives, not our own, that would be constrained.
There is no doubt that the plight of unemployed service workers during the ongoing pandemic is dire. However, sending them $2,000 checks will not achieve a sustainable recovery, as Professors John Cogan and John Taylor have noted. In my previous writing, I have suggested that relief payments be accompanied by government spending to train workers for skills that are in greater demand. Rather than meet an unending demand for fish, it would be more productive to provide a smaller supply with the rest of the time spent teaching the person to fish.
We know the saying but it is worth repeating. There is no such thing as a free lunch.
Komal S. Sri-Kumar
President, Sri-Kumar Global Strategies, Inc.
January 30, 2021
Sri-Kumar Global Strategies, Inc. advises multinational investors and sovereign wealth funds on global risk and opportunities. Dr. Sri-Kumar is regularly featured on business TV and Radio media, and is a frequent speaker in global financial centers on major topics that affect markets and investments.
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