The covid-19 pandemic has forced governments around the world...
...to borrow and spend at an almost unprecedented rate
Between April and June, America alone has borrowed $3trn...
...the largest amount borrowed in a single quarter since records began
The rise in public debt has been...
...unlike anything we’ve seen in recent history
In the past, economists have warned against...
...high levels of borrowing
But new thinking suggests much higher levels of debt...
...might now be sustainable
The fact that there’s been such a dramatic change in the consensus...
...makes some people nervous
How much of a cause for concern...
...should the world’s rising public debt be?
Governments have borrowed to finance their spending...
...for hundreds of years
At the end of the Napoleonic wars in 1815...
...Britain’s debt was 164% of GDP
And after the second world war it was even higher...
...at 259% of GDP
Historically, governments have borrowed for a few main reasons...
...probably the biggest one was to fight wars
But in the past 100 years or so...
...governments have increasingly used their debt...
...as a way to try to keep the economy on track
To raise money, governments issue bonds to investors
These are in effect IOUs that are repaid over a fixed term...
...with interest at a rate that depends on the length of the bond
How desirable these bonds are to investors...
...depends on the country’s creditworthiness
They tend to be very safe assets...
...with governments you can usually count on getting your money back
Once a bond has been sold by the government out into the market...
...it can be swapped and traded as many times...
...as people care to
And that gives you a sense of how markets view...
...the creditworthiness of the government
Government bonds are bought by many different investors, including...
...pension funds, hedge funds, banks and individual investors...
...as well as a country’s own central bank and local government
Foreign governments also buy bonds
The biggest foreign holders of America’s public debt...
...are China and Japan
If you have a safe asset that everyone will accept...
...like US government bonds...
...you can sell those bonds in a crisis, get dollars...
...and then use that to make sure you don’t get into trouble
So there’s quite a lot of potential buyers out there for government bonds...
...and really they could end up all over the world
Governments’ willingness to issue bonds, and increase public debt...
...has changed over time
After the sky-high debts of the second world war...
...many governments were wary of going further into the red
But they continued to borrow...
...and in the 1970s, this was blamed for high inflation
A lot of economists spoke to governments and said...
...the reason you’re facing these high rates of inflation...
...is because you’re borrowing so much
It’s adding too much money into the economy...
...for the economy to easily absorb...
...and it’s pushing up prices
That really ushered in a sea change...
...in the way that governments think about debt...
...and so the use of borrowing as a macroeconomic tool...
...slowly petered out...
...until we got to the global financial crisis
Now it’s official, we are in a recession
Major financial institutions have teetered on the edge of collapse...
...and some have failed
In the rich world, the financial crisis pushed public debt...
...from 74% to around 105% in the decade following the financial crisis
And in emerging economies it rose...
...from roughly 35% to 48% of GDP
This ballooning debt caused political panic...
...with some governments pursuing strict austerity...
...to try to bring their budget deficits down...
...during the decade that followed
But it didn’t go entirely to plan
By about 2014 the lessons of that experiment...
...began to be pretty clear
And what we learned was austerity in a time of economic weakness...
...hurts economies so much that it basically doesn’t do any good
The economy becomes so weak...
...that you’re not earning enough in tax revenues to make it worth it
These problems with austerity led to new thinking
In 2019 former IMF chief economist, Olivier Blanchard...
...gave a game-changing speech
He argued governments could borrow...
...far more than previously believed
I think the fact that there’s been...
...such a dramatic change in the consensus...
...makes some people nervous
But at the same time it wasn’t a rash decision they made...
...it was heavily influenced by what was going on in the world around them
Blanchard observed interest rates on government bonds have been falling...
...making it cheap for some governments to borrow money
At the same time, the economy was growing
Take America: the rate of nominal GDP growth...
...which is GDP before it has been adjusted for inflation...
...has generally been higher than interest rates for the past 30 years
This matters, because as long as GDP is growing...
...faster than the country’s debt is accumulating interest...
...and governments keep additional borrowing in check...
...then a nation can effectively grow its way out of debt...
...at no fiscal cost
Mathematically, it’s a very straightforward point
But when you’re explaining this to governments...
...and saying, “This is how it goes”...
...that ends up being quite a powerful thing
Not even a year after Blanchard gave his speech...
...coronavirus emerged in Wuhan...
...and the greatest exercise in public borrowing for generations began
Government borrowing hit a record £55bn
Ballooning public debt
Around $300bn or 16% of GDP
But not every country can borrow its way through the pandemic
Almost every government has found it easier to borrow now...
...than it was 30 or 40 years ago
But the difference between a rich country and a poorer country...
...which doesn’t have a long record of borrowing on foreign markets...
...those places can’t get the same interest rates
It is a source of significant inequality...
...in terms of how countries face this pandemic...
...that some places can borrow almost as much as they want...
...to support their economies and others can’t
Borrowing on this scale is not without risk for anyone
You owe us a lot of money
What?
As there is always the threat that interest rates could rise again
Economists aren’t entirely sure...
...why these rates have been low for so long
In general, interest rates on mortgages, government bonds...
...or savings accounts are driven by demand
If the desire to save is high, then interest rates will be low...
...as banks, or governments issuing bonds...
...don’t have to tempt investors with favourable rates
There are several factors driving the desire to save...
...which might be keeping interest rates down
The ageing population might be one cause...
...as people tend to save for retirement...
...and pension funds buy government bonds
And fear of global financial instability may also play a part...
...causing investors to seek safe assets like bonds
We can’t be completely sure why exactly it’s happened...
...and that matters because if you can’t be certain why it happened...
...in the first place...
...you can’t say for sure that it’s not going to reverse itself...
...at some point in the future, which would be a big deal
You know if interest rates suddenly soared...
...then all the countries that had accumulated a lot of debt...
...would suddenly be in very big trouble
Despite these risks, the pandemic has left many countries with no option...
...but to keep borrowing
To cut deficit spending now...
...while the global economy is still crippled by the pandemic...
...would inflict lasting damage
But how much, and how long...
...countries can continue to borrow is unclear
And the colossal debt built up in the past six months...
...will be one of the greatest legacies of the pandemic
I’m Ryan Avent, economics columnist at The Economist
We’ve written a series of articles that cover the basics...
...on a range of economic topics...
...and how the latest thinking about them is evolving
You can read more at the link opposite
Thank you for watching