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COVID-19 & the debt tool

September 12th, 2020 | Tags:
Dickson C. Igwe. Photo: VINO/File
By Dickson C. Igwe

In a world that was already awash with debt, before the COVID-19 pandemic, it appears debt remains the one tool for keeping the global economy alive until the pandemic ends

OK. The good news is that the COVID-19 pandemic may well be over by December 2021.

A vaccine is expected to be approved and widely distributed in 2021. There is also the development of swift testing using a basic saliva test that offers immediate results. Both of these- vaccine and swift test- will see the world return to an economic normal by early 2022.

Then the vaccine must be safe. Globally, pharmaceutical companies are in a rush to develop and market any approved vaccine in 2021.

Internationally, lockdowns to prevent the spread of COVID-19 has placed much of the global economy on life support. The Caribbean and the Virgin Islands are not alone in their economic struggle. And catastrophic job losses from the shuttering of businesses are a worldwide phenomenon.

Consequently, the one route back to normalcy is government investment and public borrowing, to keep economies on life support.

Countries with multi-trillion-dollar GDPs can borrow cash cheaply, especially in a post-2008 deflationary environment.

The USA for example has borrowed over 3 trillion dollars from investors through QE. This has kept the US economy from total collapse.

The same is true for much of Europe, where huge government borrowing is keeping people and businesses from poverty and bankruptcy.

The current economic solution to forestall widespread economic collapse is government’s insuring their countries against the huge costs of the pandemic through public spending and stimulus packages.

Thankfully the world is faced with super-low interest rates and deflation.

The preceding means governments can borrow cheaply and sustainably, even without limit. The reason is that interest rates over the past decades have been on a declining trend. Then post the 2008 recession the deflationary environment has persisted.

Consequently, everywhere, borrowing costs are low.

Governments around the world can sustain much greater debt levels in a world of cheap debt.

Then inflation is not a worry. In past years flooding the markets with cash led to inflation which was a turn off for savers and led to boom and bust cycles.

However, when there is low inflation, investors are happy buying government debt, even though that debt earns a low rate of interest.

The fact is that in the age of COVID-19, the one route to a sustainable economy, short, medium, and long term, and amid economic disaster, is government borrowing and huge public spending.

Thankfully, in an environment of low inflation, borrowing trillions of dollars from investors to inject into the world economy remains sustainable, even desirable.

The one caveat is that this debt will have to be repaid in the coming years.  And a global debt overhang lasting well into the 2030s will have consequences yet unknown for even the most brilliant economists.

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1 Response to “COVID-19 & the debt tool”

  • E. Leonard (12/09/2020, 12:52) Like (1) Dislike (1) Reply
    It is cheap money but it is not free money, for it has to be paid back. Covid-19 has severely impacted the economies of developed, emerging and developing countries, changing lives and livelihoods. It has hit the economies of Small Island Developing States(SIDS) that includes the VI particularly hard. Regional SIDS depend heavily on trade and tourism and their economies have been heavily and severely impacted by Covid-19. The impact has resulted in high unemployment with thousands of residents leaning on government for assistance, i.e., stimulus. To meet the increasing demand for assistance, governments have had to resort to borrowing and distributing stimulus to residents to keep their economies afloat, pending the developing and distributing of a vaccine for Covid-19. As a side note, governments are often caricatured as inefficient, useless.......etc except for when they are needed.

    The increased borrowing has increased countries debt-to-GDP way above suggested levels. For example, this year the US, the world’s #1 economy, deficit will be approx $3.3T and next year for the first time since WWII its debt will exceed a 100% of its GDP.

    Moreover, Mia Mottley in an interview with CNN correspondent Christianne Amanpour noted that developed countries cannot ignore and view small regional countries as dispensable. Concur. They do so at their own peril. Advanced countries, major international organizations, eg, IMF, WB, Commonwealth of Nations.......etc must come to the aid of small, poor countries. Debt forgiveness must be a strong consideration for these small, struggling locales that are drowning in debt.

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