How much do the rising national debts matter?

A symptom of the economic response to the Covid-19 virus pandemic is more government borrowing. This flows naturally into higher government debt levels and as we are also seeing shrinking economies that means the ratio between the two will be moved significantly. I see that yesterday this triggered the IMF (International Monetary Fund) Klaxon.

This crisis will also generate medium-term challenges. Public debt is projected to reach this year the highest level in recorded history in relation to GDP, in both advanced and emerging market and developing economies.

Firstly we need to take this as a broad-brush situation as we note yet another IMF forecast that was wrong, confirming another of our themes.

Compared to our April World Economic Outlook forecast, we are now projecting a deeper recession in 2020 and a slower recovery in 2021. Global output is projected to decline by 4.9 percent in 2020, 1.9 percentage points below our April forecast, followed by a partial recovery, with growth at 5.4 percent in 2021.

It is hard not to laugh. At the moment things are so uncertain that we should expect errors but the issue here is that the media treat IMF forecasts as something of note when they are regularly wrong. Be that as it may they do give us two interesting comparisons.

These projections imply a cumulative loss to the global economy over two years (2020–21) of over $12 trillion from this crisis………Global fiscal support now stands at over $10 trillion and monetary policy has eased dramatically through interest rate cuts, liquidity injections, and asset purchases.

Being the IMF we do not get any analysis on why we always seem to need economic support.

What do they suggest?

Here come’s the IMF playbook.

Policy support should also gradually shift from being targeted to being more broad-based. Where fiscal space permits, countries should undertake green public investment to accelerate the recovery and support longer-term climate goals. To protect the most vulnerable, expanded social safety net spending will be needed for some time.

Readers will have differing views on the green washing but that is simply an attempt at populism which once can understand. After all if you has made such a hash of the situation in Argentina and Greece you would want some PR too. That leads me to the last sentence, were the poor protected in Greece and Argentina under the IMF? No.

The IMF has another go.

Countries will need sound fiscal frameworks for medium-term consolidation, through cutting back on wasteful spending, widening the tax base, minimizing tax avoidance, and greater progressivity in taxation in some countries.

Would the “wasteful spending” include the part of this below that props up Zombie companies?

and impacted firms should be supported via tax deferrals, loans, credit guarantees, and grants.

Now I know it is an extreme case but this piece of news makes me think.

BERLIN (Reuters) – German payments company Wirecard said on Thursday it was filing to open insolvency proceedings after disclosing a $2.1 billion financial hole in its accounts.

You see the regulator was on the case but….

German financial watchdog #Bafin last year banned short selling in its shares, and filed a criminal complaint against FT journalists who had written critical pieces. .. ( @BoersenDE)

Whereas now it says this.

The head of Germany’s financial watchdog says the Wirecard situations is “a disaster” and “a shame”. He accepts there have been failings at his own institution. “I salute” those journalists and short-sellers who were digging out inconsistencies on it , he says. ( MAmdorsky )

As you can see the establishment has a shocking record in this area and I have personal experience of it blaming those reporting financial crime rather than the criminals. I raise the issue on two counts. Firstly I am expecting a raft of fraud in the aid schemes and secondly I would point out that short-selling has a role in revealing financial crime. Whereas the media often lazily depict it as being a plaything of rich financiers and hedge funds. Returning directly to today’s theme the fraud will be a wastage in terms of debt being acquired but with no positive economic impulse afterwards.

Still I am sure the Bank of England is not trying to have its cake and eat it.

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Debt is cheap

The IMF does touch on this although not directly.

monetary policy has eased dramatically through interest rate cuts, liquidity injections, and asset purchases.

It does not have time for the next step, although it does have time for some rhetoric.

In many countries, these measures have succeeded in supporting livelihoods and prevented large-scale bankruptcies, thus helping to reduce lasting scars and aiding a recovery.

Then it tip-toes around the subject in a “look at the wealth effects” sort of way.

This exceptional support, particularly by major central banks, has also driven a strong recovery in financial conditions despite grim real outcomes. Equity prices have rebounded, credit spreads have narrowed, portfolio flows to emerging market and developing economies have stabilized, and currencies that sharply depreciated have strengthened.

Let me now give you some actual figures and I am deliberately choosing longer-dated bonds as the extra debt will need to be dealt with over quite a period of time. In the US the long bond ( 30 years) yields 1.42%, in the UK the fifty-year Gilt yields 0.43%, in Japan the thirty-year yield is 0.56% and in Germany it is -0.01%. Even Italy which is doing its best to look rather insolvent only has a fifty-year yield of 2.45%

I know that it is an extreme case due to its negative bond yields but Germany is paying less and less in debt interest per year. According to Eurostat it was 23.1 billion in 2017 but was only 18.5 billion in May of this year. Care is needed because most countries pay a yield on their debt but presently the central banks have made sure that the cost is very low. Something that the IMF analysis ( deliberately ) omits.


So we are going to see lots more national debt. However the old style analysis presented by the IMF has a few holes in it. For a start they are comparing a stock (debt) with an annual flow (GDP). For the next few years the real issue is whether it can be afforded and it seems that central banks are determined to make it so. Here is yet another example.

Brazil may experiment with negative interest rates to combat a historic recession, says a former central bank chief who presided over some of the highest borrowing costs in the country’s recent history ( @economics)

That is really rather mindboggling! Brazil with negative interest-rates? Anyway even the present 2.25% is I think a record low.

If we go back to debt costs then we can look at the Euro area where they were 2.1% of GDP in 2017 but are expected to be 1.7% over the next year. Now that does not allow for the raft of debt that will be issued but of course a few countries will be paid to issue ( thank you ECB!). The outlier will be Italy.

Looking further ahead there is the capital issue as this builds up. I do not mean in terms of repayment as not even the Germans are thinking of that presently. I mean that as it builds up it does have a psychological effect which is depressing on economic activity as we learnt from Greece. Which leads onto the final point which is that in the end we need economic growth, yes the same economic growth which even before the pandemic crisis was in short supply.


21 thoughts on “How much do the rising national debts matter?

  1. Shaun, remember, “govt debt” is exactly equal to “non-govt net savings”. To the penny.

    To understand why sovereign currency issuing governments have a debt, it’s useful to look at the example of Norway:

    Norway is a smallish country (population just over 5m), but one that is undoubtedly, by any measure, exceptionally wealthy. It has huge natural resources, not just hydrocarbons, but also fish, forestry and hydro. Many Norwegians have made small fortunes from gas and oil exploration and extraction and also from fishing. The state itself famously has a SWF with foreign currency assets which have recently just topped $1trn in value. Norway is undoubtedly a very, very wealthy country.

    The Norwegian government, though………is in debt.

    It’s in debt to the tune of about NOK 1.5trn (about $150bn). Not huge, but for a country of 5m souls, significant. All the govt’s debt is denominated in NOK. It doesn’t have any foreign currency debt.

    So why is the government of such a wealthy country in debt?

    The answer is simple. The government’s liabilities (banknotes, coins, reserve balances and govt bonds) are the NOK net financial assets of everybody else. For Norway, ‘everybody else’ is going to be Norwegian households and companies, since, not being considered to be a reserve currency, nobody outside of Norway is going to be have significant amounts of NOK denominated financial assets (or liabilities).

    In order for Norwegian households and companies to be able to hold net NOK financial assets (banknotes and coins, reserve balances held by Norwegian banks and government bonds held by those Norwegians that wish to have ultra-safe savings in NOK financial assets), the Norwegian govt has to have a debt. There is no other way. It has to issue the liabilities that are the net financial assets of the Norwegian people. The Norwegian people have, on average NOK 300K ($30k equiv) of net NOK savings per head of the population (on top of any foreign currency savings), which means the Norwegian govt has NOK 300k of debt per head of the population.

    The reason why the Norwegian govt is in debt is because the Norwegian people need to hold NOK currency (notes, coins and reserves) and safe NOK longer term assets (govt bonds). The Norwegian government, as the currency issuer, is the only entity that can supply those assets, as its liabilities.

    This is true of Norway and it is true of every single sovereign currency issuer, that issues a freely floating non-convertible currency. The UK govt is such a currency issuer.

    • Well said and explained Robert. I explain this in my film ‘ Money for Nothing ‘ on YouTube . It is more than gratifying to know that there are other people who understand that government debt is someone else’s savings .

    • Brilliant analysis as usual Sir Humphrey, as you continue to educate us here on Shaun’s blog, but perhaps you can explain why the UK is always such a weak performer economically and has to resort to continually devaluing its currency in order to give the illusion its economy is nothing more than a “Potemkin village” of house flippers and black marketeers posing as a first world economy?

      • well since the use of privateers was largely abandoned after the signing of the Treaty of Paris in 1856 we’ve have to take up other options…….



        Sir Henry Morgan does make a fine rum ! arrrr Jim lad …..

      • Robert has outlined the accounting identities in relation to national funds; it is a stock concept.

        Economic performance is a flow and is a “real” concept. If you add population growth to productivity trends you will have a good estimate of the secular trend of GDP. But economic performance is a result in no small measure of the “catc all” term “productivity trends” as it encompasses technical progress in the widest sense. This varies from country to country.

  2. Not a jot if it saves the banks. Where will I get my corrupt, post-career sinecure without such craven vaseline-arsed sycophancy?

    • Hi therrawbuzzin

      Some news for you from the other side of the pond.

      “U.S. banking regulators are about to ease restrictions created in the aftermath of the Great Recession, a development that sent bank stocks surging.
      FDIC officials said they are loosening the restrictions from the Volcker Rule, allowing banks to more easily make large investments into venture capital.
      The companies will also be able avoid setting aside cash for derivatives trades between different affiliates of the same firm.
      That could free up billions of dollars for the industry.” ( CNBC)

      It makes you wonder why the rule was introduced. Oh hang on…..

  3. Great blog as usual, Shaun.
    You didn’t make any specific reference to credit ratings in your blog. Fitch downgraded Canada’s credit rating from AAA to AA- yesterday, with outlook stable. With his usual cavalier disregard for the facts, PM Trudeau had bragged during the English language leadership debate in October 2019 that “only Germany and Canada had unanimous AAA credit ratings” when in fact, at that time, nine other countries were top-rated by the four major international credit rating agencies, including Australia, Norway, Sweden and Switzerland. Canada and Germany were the only G8 countries unanimously top-rated. Later, after the election, Trudeau promised that he would preserve our treasured AAA status, which should have warned us that it was about to disappear. So now the only G8 country with a top credit rating from all four agencies, S&P, Moody’s, Fitch and DBRS, would be Germany. The US has an AA+ rating from S&P but top ratings from the other three. Fitch did not choose, at least for the moment, to downgrade the US credit rating. Looking forward, Fitch sees in a best case scenario, Canada’s credit rating rising again to AAA, while in a worst case scenario it would drop to a D.

    • Hi Andrew and thank you

      Your reply made me check the report from Fitch more carefully and the opening paragraph could be about pretty much any country right now.

      “The rating downgrade reflects the deterioration of Canada’s public finances in 2020 resulting from the coronavirus pandemic. Canada will run a much expanded general government deficit in 2020 and emerge from recession with much higher public debt ratios. The higher deficit is largely driven by public spending to counteract a sharp fall in output as parts of the economy were shuttered to contain the spread of the coronavirus. Although this will support recovery, the economy’s investment and growth prospects face challenges.”

      The only mention of debt costs is an implied one.

      “BoC’s liquidity facilities and asset purchases swelled its balance sheet to 23% of GDP in mid-June from 5.5% of GDP in January, and purchases of federal government debt will continue.”

      So let me help out. The ten-year yield is 0.53% so if we look at the US with its 0.68% equivalent I am sure more than a few will wonder like you about how it has escaped the ratings axe.

      • Thank you, Shaun. The last time Fitch changed its credit rating for Canada was in August 2004, when Liberal PM Jean Chrétien was PM and the rating was upgraded to AAA. Oddly enough there was no mention of it at all on the two-hour CBC public affairs program Power & Politics.

  4. Hi Shaun

    Great article as always. And this is why the uk is in such a pickle. the uk public are already the most taxed they have ever been. And in the next year tax revenues are going to crumble. On july 7th (I think), Rishi is going to announce his emergency budget. NI and income tax are two largest contributors to taxation. They are going to fall dramatically in the next year. this is followed by VAT. But the rumours are that this will be cut to encourage consumer spending.

    How will the government obtain its revenue? One of the largest assets bases in the country is land and housing. Replace council tax with a LVT of 0.5%, increasing for empty properties, BTL and shell company owned housing. This can be offset against death duties for the poor widow in her £1m flat. An empty £ 60m flat in london is only charge a few k in council tax. If it was 5% per year, it would encourage owners to utilise thier assets rather than use London as a store of wealth.

    Of course it will never happen 😉

    • If only there was a way that the government could ensure that the private sector had sufficient income, perhaps by injecting money into the economy every year, to ensure the private sector could afford whatever tax bills the govt sends out.

      What if the government injected, say £1trn into the economy, which would be more than enough to cover the £700bn or so of tax that the general population are going to be paying. That would leave £300bn in circulation for the population to use for their own requirements.

      If, at a later date, that £300bn was no longer required, it too could be drained out of circulation by sending out tax bills in the future. If however, it was still going to be required (either because the population wanted to save more, or have lower debts), it could just be left in the economy. In fact, it would have to be left in the economy.

      • It could do this by nationalising all the banks headquartered in the UK and creating a national bank. Then we would have a seamless money creation / banking financial sector which could tax back ( aka revenue ) the money no longer required.

  5. Printing money causes inflation. That’s a given.
    But if that printed money is only poured into assets – property, stocks & shares, it only causes inflation for the 10% of the population who own 95% of those assets, making them wealthier.
    Unfortunately extrapolation of this practice means the 90% will ultimately have to spend all their income on housing costs, energy and food. Leaving no cash to fuel the economic boom.
    The 10% will shift all their gains via off-shore tax havens to minimize paying UK taxes.
    As has been inferred many times before on here, “More cake, Marie-Antoinette…?” 😦

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