At the beginning of this year, the global economy fell into recession due to the coronavirus pandemic and has not yet emerged from it. Analysts do not exclude that the economy could fall into a deeper recession as the huge national debt of some countries is rising day by day.
For example, economists are worried about the growing US government debt which will soon exceed 100% of its GDP. This has never happened in history.
The majority of experts say it is necessary to continue stimulating the economy at least in the amount of $1.5 trillion. The US Congress should also expand additional unemployment insurance and payroll protection for small businesses.
By the way, the US presidential elections will be held in November. So, most economists argue that the next administration should respond to such challenges as the spread of COVID-19 and should also restore the economy and health policy in the first year after elections.
The fight against the coronavirus is taking huge amounts of money from many countries. As a result, the national debt has reached the levels that have not been seen since World War II. For example, in 1946, the global debt-to-GDP ratio was 124%, while now developed economies have accumulated debts in the volume of 128% of world's GDP.
Glenn Hubbard, who chaired the Economic Council under President George W. Bush, argues that it is important to focus on controlling the spread of COVID-19 rather than counting the national debt. Indeed, if the virus is not defeated, the financial losses may be even greater.
In the postwar period, developed countries quickly paid off 50% of their debts as a result of the rapid economic growth. The economy began to grow thanks to the high birth rate which led to a rise in the labor force. On average, in the fifties the economies of developed countries grew by about 5% per year. However, now it is unlikely that the debt can be cut quickly due to demographics, technology, and a slower economic recovery. Nathan Sheets, the chief economist at PGIM Fixed Income, said a miracle would happen if half of those results were achieved in the next 10 years.
In recent years, the economies of the United States, Great Britain, and Germany have been growing by about 2% per year. In Japan and France, the growth rate was generally less than 1%, while Italy's GDP has hardly changed.
Today, it will be hard to achieve such results as it was in the postwar period. In developed countries, both the birth rate and the labor force have declined. As a result, productivity has also dropped. Moreover, at present, none of the G7 countries has a growth rate of even 1%.
Despite the fact that governments no longer provide stimulus programs introduced during the pandemic, it will not be possible to achieve such a reduction in public debt as it was after the end of the war.
According to the WSJ, developed countries reduced wage and price controls in the postwar period. As a result, there was a surge in inflation that helped to reduce the debt. Now there are no signs of acceleration in consumer price growth despite the huge costs for stimulating the economy. Developed nations may eventually accept a world with a much higher public debt.
Central banks have bought huge amounts of government bonds to cut long-term interest rates and support economic growth. This reduced the number of government bonds held by the population, and the interest paid on them is mainly returned to the government.
So, out of $26 trillion in US government debt, over $4 trillion belongs to the Federal Reserve System. The Bank of Japan owns more than $4 trillion in government bonds, that is, an even more significant share of the country's government debt, which is $11 trillion. At the same time, the example of Japan shows that the government debt can increase for a long time, significantly exceeding 200% of GDP without causing a financial crisis.
However, economists believe that the danger of the second wave of coronavirus still persists. It could lead to further disruptions in the economy and to a longer period of economic slowdown.