The World Is Drowning In Debt

According to the International Monetary Fund (IMF), global fiscal support in response to the crisis will be more than $9 trillion, approximately 12 percent of world GDP. This premature, clearly rushed, probably excessive, and often misguided chain of so-called stimulus plans will distort public finances in a way which we have not seen since World War II. The enormous increase in public spending and the fall in output will lead to a global government debt figure close to 105 percent of GDP.

If we add government and private debt, we are talking about $200 trillion of debt, a global increase of over 35 percent of GDP, well above the 20 percent seen after the 2008 crisis, and all in a single year.

This brutal increase in indebtedness is not going to prevent economies from falling rapidly. The main problem of this global stimulus chain is that it is entirely oriented toward supporting bloated government spending and artificially low bond yields. That is the reason why such a massive global monetary and fiscal response is not doing much to prevent the collapse in jobs, investment, and growth. Most businesses, small ones with no debt and no assets, are being wiped out.

Most of this new debt has been created to sustain a level of public spending that was designed for a cyclical boom, not a crisis, and to help large companies that were already in trouble in 2018 and 2019, the so-called zombie companies.

According to Bank of International Settlements, the percentage of zombie companies—those that cannot cover their debt interest payments with operating profits—has exploded in the period of giant stimuli and negative real rates, and the figure will skyrocket again.

That is why all this new debt is not going to boost the recovery; it will likely prolong the recession.

Debt is neither free nor irrelevant, as interventionists want us to believe, even if interest rates are low. More debt means less growth and a slower exit from the crisis, with lower productivity growth and a tepid employment improvement.

Read more of this article, by Daniel Lacalle, here…

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