Could Cheap Debt Help the Global Economy Spend Its Way Out of Trouble?
WHY YOU SHOULD CARE
Central bankers meet amid growing pressure for countries to spend more to kick-start a slowing economy.
By Tommy Stubbington
The cost of servicing the debt of developed countries has sunk to its lowest level for more than four decades, piling pressure on governments to borrow and spend more to jump-start the flagging global economy.
Advanced economies will spend just 1.77 percent of their combined gross domestic product on debt interest this year, according to the Organization for Economic Cooperation and Development — the lowest since 1975, and down from a peak of 3.9 percent in the mid-1990s. This sharp decline comes despite the huge debt piles accumulated by many countries since the financial crisis. The debt-to-GDP ratio across advanced economies has risen from 45 percent in 2001 to 76 percent this year, according to the International Monetary Fund.
The question of whether governments should launch a fresh economic stimulus by borrowing to spend more will be a key topic for attendees at today’s gathering of central bankers at Jackson Hole, Wyoming. Their annual meeting comes as fears grow that monetary policymakers are running out of tools to combat a global slowdown. Calls are intensifying for fiscal authorities to stimulate economies via projects such as infrastructure, digital connectivity and environmental improvements.
It’s like the markets are screaming at governments to borrow more.
Mark Dowding, CIO, BlueBay Asset Management
“It’s pretty straightforward: If borrowing is cheaper you should probably do more of it,” says Olivier Blanchard, the former IMF chief economist who has become an increasingly vocal advocate of looser fiscal policy. “If your interest rate is very low, then monetary policy can no longer be used the way it usually is, so you need to do more with fiscal policy.”
The drop in debt servicing costs is because of investors’ strong demand for government bonds, which has pushed the price of new borrowing to record lows. More than $16 trillion of bonds around the world trade with negative yields, meaning that some governments are in effect being paid to borrow.
“It’s like the markets are screaming at governments to borrow more,” says Mark Dowding, chief investment officer at BlueBay Asset Management.
But some skeptics worry that the easy money investors are flinging at governments could offer a dangerous temptation to add to already high debt piles.
“The availability of cheap money doesn’t mean you should borrow for the wrong reasons,” says Maya MacGuineas, president of U.S. think tank Committee for a Responsible Federal Budget. “Interest rates might be low today, but due to high debt levels we are very vulnerable to any rises in the future.”
Yet countries with relatively low levels of debt such as Germany are facing growing calls from investors and economists to increase their borrowing. “Negative yields are investors’ way of telling Germany that it doesn’t have enough debt and we could easily absorb a lot more,” says Eric Stein, a bond portfolio manager at Eaton Vance in Boston.
But the calls for more borrowing are not restricted to relatively low-debt economies like Germany. President Donald Trump signaled this week that he’s considering a fresh fiscal stimulus, which would add to his mammoth 2017 tax cuts. U.S. bond yields have since fallen, despite Trump having financed that spending program by stepping up debt issuance.
Blanchard argues that Trump has spent his stimulus in the wrong areas. “The increase in the deficit might have been justified if it had been used for public investment but it was not,” Blanchard says. He adds that calls for a more relaxed attitude to deficits should also apply to Japan, where government debt is nearly 240 percent of GDP.
“Each country is different and surely there is more room for Germany to relax fiscal policy than there is in Japan,” Blanchard says. “But even in Japan the fact that private demand is still weak and monetary policy is running out of ammunition suggests that deficits should probably not be reduced until private demand picks up.”
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