The pandemic has pushed global government debt to the highest level since World War II, surpassing the world’s annual economic output. Governments, especially in rich countries, are borrowing still more, partly to erase the damage of Covid-19.
Advocates say the spending, also encouraged by new economic thinking about debt, could usher in a period of robust global growth, reversing the malaise many wealthy countries have felt this century. But if those theories are off-base, the world could be saddled with debts that can be absorbed only via inflation, high taxes or even default.
Either way, the combination of huge debt and markets’ lack of concern is unprecedented. The U.S. government is on course for a budget deficit of $3 trillion for the second year in a row. Despite that and fears of inflation, 10-year Treasury bonds are yielding only around 1.33%, partly because of the Federal Reserve’s caution about raising its interest rates.
Japan’s central-government debt is about to surpass a quadrillion yen, or nearly $10 trillion. Even with total public debt of over 250% of gross domestic product, Tokyo spends no more on interest each year than it did in the mid-1980s, when public debt was around two-thirds of GDP.