Daunting Debt Dynamics
Episode publishedPodcast: Goldman Sachs ExchangesGoldman Sachs Exchanges
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From Goldman Sachs Research, this is Allison Nathan. Welcome to Top of Mind, a podcast that explores macroeconomic issues on the minds of our clients. In this episode, we're focusing on the recent surge of government deficits and debt levels around the world as governments attempt to ease the impact of the coronavirus pandemic. To give you a sense of just how large that debt could become, we expect debt to GDP ratios in developed markets to match levels last seen during World War two, and in emerging markets, we expect them to rise to their highest levels ever. This surge in public debt raises
Obviously, governments have taken many unprecedented steps to support their economies throughout this crisis, and we have seen a very large increase in public debt as a result. Do you think that the spending and this increase in debt is appropriate at this time?
Absolutely. We're looking at the worst natural catastrophe in generations probably since the Spanish Influenza. And the whole point of having a strong balance sheet is to be able to use debt aggressively when you're faced with a full on crisis and this is one where I would have no problem if they did the same again twice over if we get out of this in one piece.
But you've argued that debt to GDP ratio is 90% or higher for developed economies is generally associated with growth rates and something to be somewhat concerned about. Do you still think that's the case?
So I would have to say my views have been misstated by Polymaths in our paper. Carmen Reinhart and I created a new data set on debt. We group debt from all advanced economies into buckets of below 30%, below 60%, below 90% and above 90%. And we observe that there is a correlation between growth and debt above 90% and that you got a slightly lower average growth. We very carefully clarified that having your debt go from 89% to 90% no more meant you were going to have a big change than if your cholesterol level went from 199 to 200 or that you drove at 56 miles an hour instead of 55 miles an hou
And here's our chief economist, Jan Steyn.
What the government is basically doing is stepping into the breach that the private sector has left. Private sector is pulling back very hard. Demand is weak. Economic activity is weak. And in that environment, for the government to run extremely large deficits, I think is not inflationary. It's not I think a reason to worry about a debt crisis at least in an economy like The U. S. Or The UK or Japan or other advanced economies that have floating exchange rates and their own central bank. And it's certainly not a reason to worry about a growth drag. I can see the correlation, but the causation
However, Rogoff emphasized that high deficits and debt levels are nevertheless not a free lunch even with today's low interest rates, and markets are going too far and expecting that real rates and inflation will never rise.
Do you share views by Blanchard and others that these very low interest rates basically are a reason to be less concerned about the implications of debt?
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