What music have you been playing during the last nine months, the months of the Great Pandemic? For me, the lyrics of David Byrne and the other members of Talking Heads have been buzzing through my head, especially the song “Life During Wartime”, which ends,
“Try to stay healthy, physical fitness
Don’t want to catch no disease
Try to be careful, don’t take no chances
You better watch what you say”.
I’ve lost count of the number of times government heads around the world have clawed after wartime metaphors to describe Covid-19 and depict the efforts needed by the public to “fight” it. Back in March the UK Prime Minister, Boris Johnson, hauled the corpse off the mortician’s table and told the UK via TV that “we must act like any wartime government and do whatever it takes to support our economy”. Not that he’s alone. France’s President Macron said in March “we are at war” and Donald Trump referred to himself as a “wartime president”. German politicians don’t use the war metaphor. The closest Angela Merkel has come to it was in her televised address (also in March) when she said that Germany faced its biggest challenge since the Second World War.
But she did say that Germany would do “whatever it takes” to get the economy back on its feet. This “whatever it takes” became the central banker’s mantra after Mario Draghi, former president of the European Central Bank (ECB) first used it in 2012, saying “the ECB is ready to do whatever it takes to preserve the euro”. The ECB has stuck to Draghi’s words; in March it abandoned its self-imposed limit of buying government bonds up to 33% of the debt of each Eurozone member state under the newly-invented ‘Pandemic Emergency Purchase Programme’. The skies the limit when it comes to buying up newly-created money.
We have reached the point where fiat money goes round and round in circles. National governments issue debt and their central banks buy it up. This model of capitalism is already well-honed in Japan and the US. The level of global debt in the first nine months of 2020 rose by $15 trillion and its now on track to exceed $270 trillion, representing 365% of global gross domestic product by the end of this year. About $7 trillion will have to be repaid by the end of 2021.
Even German politicians, the most fiscally disciplined of all their peers, are starting to worry about accumulated debt. The finance minister, Olaf Scholz, plans to double the amount of new borrowing in 2021 to €180 billion, on top of the €218 billion debt it has shouldered so far in 2020. Scholz has succeeded in fiddling with the German constitution, suspending until 2022 the so-called ‘debt brake’, the supposed guarantor of fiscal rectitude which limited the budget deficit to a mere 0.35% of gross domestic product. Germany has always been a byword for fiscal prudence – but no longer.
The new US President will have a new Treasury Secretary, Janet Yellen, the first woman to hold this post. She was also the first female chair of the Federal Reserve (2014-18) under President Obama. At 74, she is four years younger than Joe Biden. On 27 June 2017, she said she did not expect another financial crisis “in our lifetime” yet by February this year (when the Covid-19 pandemic had just got going) she said the US was on a “completely unsustainable” debt path. By the time Biden has served his four years in office the US national debt will have (on current estimates) have ballooned to more than $48 trillion, from more than $27 trillion today. The cost of interest payments on this debt is the fastest growing ‘programme’ of the US federal budget.
The Bank for International Settlements (BIS) published in 2011 a paper which asserted that when government debt is around 85% of GDP (gross domestic product) debt then becomes a “drag on growth”; the ratio of debt to GDP rose “relentlessly” from 167% in 1980 to 314% by 2011.
In the US the ratio of debt to GDP will probably be above 98% by the end of this year while in the UK government debt was 100.5% of GDP by the end of July this year. Germany’s debt-to-GDP ratio this year has also exploded but is at a relatively low level, rising to around 76%, while in the Eurozone the ratio is around 95%.
Why high debts matter
It’s obvious – debts have to be re-paid or at least interest paid on them. The US, the UK, the Eurozone, have all piled on ‘wartime’ debts this year to try to protect their populations from economic distress. The argument is that while interest rates are close to zero then servicing the debt is painless; the hope of governments meanwhile – and it can be no more than a hope – is that once Covid-19 is just a bad memory, then economic growth will return and the debts can be rolled over until they are in a better shape to repay them. Certainly the world’s international institutions and their leaderships are showing remarkable calm in the face of this vast indebtedness. Oliver Blanchard, formerly chief economist at the International Monetary Fund (IMF) last year said in a speech: “Put bluntly, public debt may have no fiscal cost… The probability that the US government can do a debt rollover, that it can issue debt and achieve a decreasing debt-to-GDP ratio without ever having to raise taxes later, is high”.
The risk of a house of cards – and global debt is a house of cards – is that it rapidly collapses: we can have no idea how long investors will be patient with ridiculously low interest rates for accepting the risk of governments defaulting on their debts. Investors in US Treasury bonds currently show no signs of tiring of their lending. That may well be because the US has a very large gold holding, as does Germany. This gives jumpy investors some comfort that even huge debts are supportable.
Yet Joe Biden has made it clear he wants another big stimulus package, to match the $2.2 trillion given out in April. If he and Janet Yellen succeed in this aim – and a bi-partisan group of US senators has just proposed a $908 billion splurge – then one probable side-effect will be a weaker US dollar, which Citibank in any case reckons will fall by as much as 20% in 2021. A weaker dollar will mean that gold prices will go up – the time is ripe for considering topping-up your Glint card.
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