Are Public Deficits Out of Control?

"It is incumbent on every generation to pay its own debts as it goes. A principle which, if acted on, would save one-half the wars of the world." -Thomas Jefferson

Rising debt levels

To begin with, an admission. The subtitle of this month’s Absolute Return Letter – Is Gold the Answer? – will only get a brief mention this month and will instead be covered in more detail next month. It is a terribly important topic and deserves more space than the couple of paragraphs I could allocate to it this month.

Next, the bad news. According to the IMF, global debt continues to rise at a mind-blowing pace. On a worldwide basis, as at the end of 2020, public debt-to-GDP in advanced economies had risen to 124% (sources: IMF and Exhibit 1). The 2021 numbers have not been published yet but, given the continued economic damage from COVID-19, an even grimmer picture will probably emerge later this year, when those numbers are published.

Exhibit 1: Public debt-to-GDP in advanced economies

Sources: Finanzgruppe Deutscher Sparkassen und Giroverband, IWF, Helaba

According to the IMF, at the end of 2020, total global debt (household, corporate non-financial and government debt combined) added up to US$226Tn – equivalent to a debt-to-GDP ratio of 256% – up 28% from the previous year with government borrowings accounting for slightly more than half of the increase. I am sure some of you will argue that 124% is not the end of the world, but those who argue that seem to have forgotten that:

i. once you have removed those countries from the list that manage their debt responsibly, a much bleaker picture emerges;

ii. with interest rates rising rapidly, refinancing existing debt will be a great deal more expensive than many governments are prepared to admit; and

iii. although you may not remember this, when the Eurozone was created, 60% public debt-to-GDP was considered the most member countries were allowed.