As per various reports, central banks and governments worldwide have
unleashed more than $15 trillion of stimulus to counter the economic slowdown
caused by the outbreak of COVID-19 virus. Considering that the global economy
had still not recovered fully from the global financial crisis (2008-09), this
slowdown appears much more serious. It is like a cancer patient relapsing after
responding to the treatment and showing some signs of recovery.
As per the estimates made by the Institute of International
Finance estimates (IIF), total global debt has risen $87 trillion since 2007.
Out of this government debt accounts for about $70 trillion, while the rest is
private debt. The IIF estimates show that the total global debt may rise year
to over 340% of the global GDP, assuming moderate recession of 3% in Global
GDP. A more severe decline in economic activity will of course make the
situation worse. The question is how this debt will ever be repaid, especially
if the burgeoning debt keeps the fiscal bandwidth of the heavily indebted
governments under check, constricting the public spending.
Traditionally, the governments have used many methods have been
used to repay the public debt. For example, the following are some of the
popular methods:
(a) Hiking taxes to
augment revenue, so that the debt could be repaid.
(b) Rationalizing
public expenditure to spare resources for debt repayment.
(c) Causing inflation in
the economy so that the value of money depreciates and real debt comes down.
(d) Devaluing
currency.
(e) Converting debt into
equity of state owned enterprise, e.g., by issuing convertible securities of
state owned enterprises; selling or divesting public assets to raise money for
debt repayment; nationalizing private sector enterprises, etc
(f) Managing current
account surplus to augment national reserves for repaying external debt.
(f) Replacing the existing
debt with new debt bearing lower interest rate.
(g) Exponential rise in
productivity
(h) Reneging on debt
repayments.
(i) Changing the global
monetary system, e.g., from silver standard to gold standard and from gold
standard to fiat currencies etc.
Most of these methods directly or indirectly impact the savers
and pensioners adversely and benefit the leveraged businesses and indebted
household; inevitably resulting in further rise in socio-economic inequalities
and poverty.
Given the scale of the debt and conditions of the global
economy, I believe that the present situation is unprecedented and we may not
have a solution template available to the governments. Since the global
financial crisis in 2008-09, the central banks and governments have applied a
variety of innovations to the conventional monetary and fiscal solutions. It
would therefore be not totally inappropriate to believe that the solution to
the problem of burgeoning debt will also be innovative. It may be a cocktail of
the above cited conventional methods with or without suitable modifications.
Two things though I am confident about is that (i) this debt will not be paid
in cash as an honest borrower pays to the lender; and (ii) the global monetary
system will not be the same 10years from now, as it exists today.
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