Continuing from last week …
As per various reports, central banks and governments worldwide have unleashed more than $15 trillion of stimulus to counter the economic slowdown caused by the outbreak of COVID-19 virus. Considering that the global economy had still not recovered fully from the global financial crisis (2008-09), this slowdown appears much more serious. It is like a cancer patient relapsing after responding to the treatment and showing some signs of recovery.
As per the estimates made by the Institute of International Finance estimates (IIF), total global debt has risen $87 trillion since 2007. Out of this government debt accounts for about $70 trillion, while the rest is private debt. The IIF estimates show that the total global debt may rise year to over 340% of the global GDP, assuming moderate recession of 3% in Global GDP. A more severe decline in economic activity will of course make the situation worse. The question is how this debt will ever be repaid, especially if the burgeoning debt keeps the fiscal bandwidth of the heavily indebted governments under check, constricting the public spending.
Traditionally, the governments have used many methods have been used to repay the public debt. For example, the following are some of the popular methods:
(a) Hiking taxes to augment revenue, so that the debt could be repaid.
(b) Rationalizing public expenditure to spare resources for debt repayment.
(c) Causing inflation in the economy so that the value of money depreciates and real debt comes down.
(d) Devaluing currency.
(e) Converting debt into equity of state owned enterprise, e.g., by issuing convertible securities of state owned enterprises; selling or divesting public assets to raise money for debt repayment; nationalizing private sector enterprises, etc
(f) Managing current account surplus to augment national reserves for repaying external debt.
(f) Replacing the existing debt with new debt bearing lower interest rate.
(g) Exponential rise in productivity
(h) Reneging on debt repayments.
(i) Changing the global monetary system, e.g., from silver standard to gold standard and from gold standard to fiat currencies etc.
Most of these methods directly or indirectly impact the savers and pensioners adversely and benefit the leveraged businesses and indebted household; inevitably resulting in further rise in socio-economic inequalities and poverty.
Given the scale of the debt and conditions of the global economy, I believe that the present situation is unprecedented and we may not have a solution template available to the governments. Since the global financial crisis in 2008-09, the central banks and governments have applied a variety of innovations to the conventional monetary and fiscal solutions. It would therefore be not totally inappropriate to believe that the solution to the problem of burgeoning debt will also be innovative. It may be a cocktail of the above cited conventional methods with or without suitable modifications. Two things though I am confident about is that (i) this debt will not be paid in cash as an honest borrower pays to the lender; and (ii) the global monetary system will not be the same 10years from now, as it exists today.