Yet few are putting forward the consequences of the inexorable rise in debt to save the world and fewer are looking at a “never normal” future.
As the world spirals into the worst crisis since the Great Depression, the Fed and Congress have bailed out everyone and everything in conjunction with a “whatever it takes” fiscal policy to keep the economy from seizing up. Desperate times call for desperate measures. However, the grievous economic costs keep piling up. Indeed the economy has rightly been considered “essential”, and to “flatten” the curve, the cure might kill the patient. To replace their zombie economies, the world’s central banks have injected trillions of bridge financing to replace the fallout in demand. In the United States, because of the escalating cost, they are set to borrow a record $4.5 trillion, with much of the debt monetized through the printing press. The Fed has not only pledged to buy more government debt but also riskier high yield corporate debt in a move to drive rates lower and save America’s economy. However, in opening the flood gates, the extraordinary multitrillion dollar bailouts estimated at 15 percent of GDP, eclipses World War II levels. Worse, the trillions are meant to buy time, but the lack of a treatment or a vaccine means that the virus could outlast the bailouts.
Misplaced Optimism
The robust fiscal response has seen a rebound in stocks on optimistic hopes of a V-shaped recovery although much of the economy is repressed by the countrywide lockdown. Everyone wants to go back to normal. However, in the longer term are economic, financial and social consequences and worries. Even before the pandemic, debt at $25 trillion was at near record levels. Still to come is the red ink hangover from contagious corporate defaults, real estate implosions and bailouts.
On average the government borrows about 2 percent of GDP each year, however the Congressional Budget Office projects a $4 trillion budgetary deficit even before the fourth relief bailout package, on pace to eclipse the biggest shortfall in US history. Fed borrowings alone could be as high as 10 times equivalent to more than 20 percent of the size of the US economy but manageable because of record low rates. The IMF has estimated that US public sector debt will grow exponentially from 5.8 percent of national income to 15.4 percent this year and net public debt alone will rise from 85 percent to 107 percent, exceeding the level in 1986. They are not alone. France, the UK and Spain will also have debt at more than 100 percent GDP. The amounts are staggering and larger than the economic output of most countries, eclipsing soon the expenditures of the last war. Debt is growing faster than the economy, and that is just for this year, raising the spectre of a new form of contagion…
- Source, King World News
