The debt—who cares?

Regardless of where you stand in regard to the American Rescue Plan, it is mind-boggling to see how little anyone in positions of political responsibility seems to care about the debt, perhaps the single most important issue facing the U.S. economy in the next few years. The same can be said of most advanced economies.

In 2009, in the aftermath of the financial crisis, the debt of the world’s advanced economies shot up the equivalent of a bit more than 10 percent of their GDP; in 2020/21, as a result of efforts to stimulate the economy in the wake of the pandemic, the debt of those same countries increased by the equivalent of almost 19 percent of their GDP. The average national debt for the entire group is now well above the size of their economies.

In many cases, of course, the figures are misleading. This is the case of the U.S., where, if you include the government’s unfunded liabilities, the debt does not amount, as we are told, to some US$28 trillion, but actually to US$100 trillion.

If the economy was growing at a faster rate than the debt in the developed world, that fact would not detract from the enormousness of the problem, but at least we could say that temporarily things were getting slightly less catastrophic. The truth, however, is that it keeps getting worse—and worse. In the world’s developed economies, the debt has multiplied by 4.5 in the last twenty years, while GDP has multiplied by only 1.9.

There was a time when proponents of indebtedness argued that deficits and debt did not matter as long as the economy kept growing. In the end, debt catches up with you one way or another, of course, but that argument has been reduced to utter garbage in the light of the reality of the last twenty years. My guess is that it will look even more ridiculous in years to come since a debt of this magnitude is itself a powerful contributor to slow (or no) growth.

How will this end? There is only one way it can end. If we rule out, (as we should, given the political implications) the kinds of fiscal cuts that taming the debt would entail, we are left with two choices—massive tax hikes and inflation. The size of the debt is such that even in the short run massive tax hikes would not begin to address the problem—not to speak of the real problem, which is that such levels of taxation would cripple any chance of future growth and therefore of addressing the debt. So, we are left with the oldest trick in the book—huge inflation. For centuries governments have resorted to inflation in order to whittle away their debts. Given the lack of realistic alternatives, I see no other way in which this horror story will eventually end, regardless of the fact that, given people’s focus on deleveraging in recent years, consumer price inflation has stayed relatively low. It just a question of time.

What is happening in financial terms is at least as momentous, and perhaps more, than the end of the gold standard in the UK and (partially) the US in the 1930s, the end of the Bretton Woods fixed-exchanged rates at the end of the 1960s and Nixon’s definitive abandonment of the gold standard in the 1970s.

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