NEW YORK, NY April 28 (DPI) – Veteran Wall Street Journal writer Greg Ip offered that the surge in government debt related to easing the pandemic’s economic fallout doesn’t matter much, as long as interest rates stay near zero, inflation stays in check and the US controls its currency.
It was a surprisingly sanguine outlook from a respected financial journalist, who asserted that Federal Reserve policies – of electronically purchasing government debt, of keeping short-term rates at zero and monitoring the rate of inflation – have so far reduced much of the risks of accruing a mountain of debt. The headline: “The Debt Is Soaring; The Risks Are Not.”
Eesh, readers replied, almost in unison. As the Number One recommended post responded: “I get more than nervous when I see articles like this … I just wonder where the cliff is and when we get to it. “
Ip wrote:
In early March, the CBO (Congressional Budget Office) predicted the debt would be 89% of GDP in 2025 and interest on that debt would cost about 2% of GDP. CRFB (Committee for a Responsible Federal Budget) now projects the debt will be 107%, yet interest will still be just about 2%. Never rule out a debt crisis, but it looks no likelier now than before the pandemic.
Readers, though, largely scoffed at the notion that the risks are somehow no greater than before, and the most popular comments confirmed that:
Wow, we have reached a perfect spot! We can take care of poverty, pay everyone not to work, fix up all our infrastructure and pay our public employees vast sums of money to control every aspect of our lives as the democrats want to do. Debt doesn’t matter anymore……..for some reason I get more than nervous when I see articles like this. It sounds like the perpetual motion machine but this time for free money. I just wonder where the cliff is and when we get to it.
As a former bond trader I partially agree here. Bonds are priced and traded on faith that the issuer will not default and the U.S. Government has the ability to raise taxes to accommodate debt service. What I know from past experience including 2008 is that trust can evaporate quickly leading to reprising of maturities and a sovereign debt crisis. All overnight paper rated AAA froze and CDO default happened quickly in 2008. So it’s OK to rack up excessive debt, until it isn’t. Just saying…
“Never rule out a debt crisis, but it looks no likelier now than before the pandemic.”
I find this an unbelievably Pollyanna-ish outlook. It is a debt crisis that we are in. The virus was simply the black swan event that triggered the tide to go out. Corps issued $4 T in debt to repurchase $4.3 T in stock the last decade, putting the debt to no productive use. A full 1,000 of the 3,300 S&P 500 was due to stock buybacks. Corp EBITDA has been flat for five years!
Yes, it should be expected that the deflationary output gap that’s been created will cause either disinflation or deflation for some period of time. Additionally, it took a full eleven years, 1929-1940, for nominal GDP to return to the pre-Drepression levels. So, we should also expect tax revenues to be depressed for a while. But, debt lasts decades, and the debt monetization should be expected to be inflationary. This article is almost irresponsible rationalization.