2024-07-03 10:53:17
The value of the global economy is estimated at 101 trillion. dollars. And debt with which governments (and consequently tax-paying citizens) are burdened worldwide amounts to 91 trillion. dollars. It is an unbearable burden, which will also affect the next generations. And what triggers the biggest concern is that it is a problem that has no painless solutions.
With half the world’s population headed to the polls this year, leaders and power-hungry contenders have largely chosen to ignore the issue of public debt. No one will hear about this in the Biden-Trump confrontations in the USA. Didn’t hear about it at French election campaign, nor in that of Britain, where the polls open tomorrow morning. It was not on the agenda of India or any other country big or small that held elections this year. In fact, in most cases we see those who promise tax cuts and spending increases gaining ground, which could (if implemented) even trigger a new financial crisis.
Free lending is over
The IMF just last week warned that “annual fiscal deficits” in USA must be “addressed as a matter of urgency”. Investors have long shared this concern about the long-term debt trajectory of the world’s strongest economy. And this is because it is clear that the era of “free” lending, i.e. zero interest rates, has irretrievably passed.
The investors, who a few years ago...they were paying countries like Germany to lend it (they used to buy its government bonds at a negative interest rate), today they demand a higher interest rate to lend to governments. And the more they see them letting deficits and debts balloon, the more they will demand.
Impact on our pocket
Yields have risen on both US and Eurozone bonds, with the pressures strongest in countries showing signs of indiscipline. The expensive cost of government borrowing directly affects our pocket. Because the answer to this may at some point necessarily be to increase taxes, reduce public spending or “cut” planned support measures.
In our loans and development
And the impact doesn’t stop there. The returns of government bonds they are used as a “guide” for the rest of the debt as well. Higher yields mean higher borrowing rates for households and businesses. And when debt burdens increase, the blow to economic growth is not long in coming. As interest rates rise, private investment and consumption fall.
Painful adjustment
Kenneth Rogoff, professor of economics at Harvard University, in his statements on CNN warns that the US and other countries will need to make painful adjustments. “In the 2010s many academics, politicians and central bankers were convinced that interest rates would remain near zero forever and were therefore beginning to think of debt as a free lunch,” he observes. “This has always been a wrong thought. We also need to think of government debt as a floating rate loan and realize that if the interest rate suddenly rises too much, the interest payments jump. That’s exactly what happened all over the world,” he explains.
The conspiracy of silence
In the U.S., the federal government will spend $892 billion this fiscal year on interest — more than it estimates it will spend on defense and about the same amount that goes to Medicare, health insurance for retirees and the disabled. Next year the interest payments will exceed 1 trillion. dollars on debt of more than 30 trillion. dollars. The Congressional Budget Office estimates that US public debt will climb to 122% of GDP 10 years from now, and will have jumped to 166% of GDP in 2054, acting as a drag on economic growth. In the election campaign no one says what this will do. The candidates content themselves with accusing each other of who caused it.
Social unrest and market attacks
As long as we sweep the problem under the rug, it acts as a fuse, lighting fires and causing explosions. The first ones come at the social level. Kenya is a prime example. Proposed tax increases aimed at reducing the debt sparked massive anti-government protests, which were drowned in blood. At least 39 people died. The country’s president, William Ruto, announced last week that he would not sign the plan into law.
In other cases we have a boom in the markets. Indicative was the case of Britain in 2022, when the fiscally incomprehensible program of Liz Truss triggered a direct attack from the markets that almost led to the collapse of the country’s pension funds. At France odds jumped momentarily when Emmanuel Macron called snap elections, but then stabilized amid speculation that even if National Rally’s Jordan Bardela is the new prime minister, he will not want to financially derail the country. And this is because it would undermine Marine Le Pen’s chances of being elected president in 2027.
Everything will be decided next Sunday, in the second round of elections, where all the results seem open. No one can say who the next government of France will be. But surely, among other things, he will have to take care of collecting the widening fiscal deficit.