Taking on debt, yes, but what for?
Following on from Keynes, it’s been years that I’ve been talking about it and outlining the mechanisms. At present, reality is catching up with the “mainstream” economists who with regret have recognised the absolute necessity for governments to deepen their debts in the current recession brought about by the health crisis.
However, while the leaders at the wheel have resigned themselves to widening public deficits, one at least theoretical question must be asked: to what extent can a government take on debt ? In truth, our Western nations have nothing to worry about as long as they are a large, industrialised, modern country with an integrated economy that sufficiently leans towards globalisation, like Japan whose public debt was at 155% of GDP…before the pandemic. It is wise, however, to be extremely careful because a public debt level – even one far lower than Japan’s – would become unmanageable, disastrous even, if the debt burden were to get too heavy in the wake of interest rates being recalibrated. Admittedly, the secular stagnation (explained at length in a number of my previous analyses) that our world is suffering through does not suggests a short-term upheaval of the current climate of close-to-zero rates to come, but it would be irresponsible for those at the top of governments to ignore this eventuality.
Already nearly a century ago, he who many of our analysts, economist and heads of state have ridiculed – him being John Maynard Keynes – wrote an open letter to President Franklin D. Roosevelt in the New York Times on 31 December 1933 in which he explained that transfers of money and tax cuts have next to no positive effect on the economy. Precious reflation in fact requires that the debts contracted by governments be chosen carefully and that they benefit as many people as possible. The ultimate goal is thus not so much to deepen public deficits as it is to manage this borrowed lifeline in and for the public good. If interest rates were again to take the ascent, political leaders couldn’t be criticised for increasing government debt as long as they invested judiciously for the country and its citizens.
At the end of this year 2020, the stabilisation of economies now depends on increased state interventionism in public spending trying to revive our economies. In our current public health emergency, the level of global interest rates offers somewhat of a unique opportunity, and probably the only chance to come out of this unprecedented crisis without too much damage. However, it is crucial to acknowledge one thing: that the quality of debt counts much more than its quantity.