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DE | Sinai Economic and Market Perspectives | Seeds of A Sovereign Debt Crisis Planted – 02/03/21
Seeds of A Sovereign Debt Crisis Planted
The U.S. and Global economies have undergone a fiscal/debt revolution of huge import from which there will be no turning away!
The main catalysts are the failure over a very long period for ultra-easy monetary policy, i.e., zero interest rates and increased central bank balance sheets, to achieve full employment and price stability and the collapse and depressions of the U.S. and world economy on the unprecedented External Shock of 2020—the Coronavirus Pandemic.
The U.S. and country-after-country already are well along the road of hugely increased central government deficit and debt-financed outlays to offset the impotence of the easy monetary policy on overcoming disinflation and deflation and a Shock-induced cratering of economies around-the-world.
Monetary policy of near zero and negative interest rates and Quantitative Easing (QE) that has built up central bank balance sheets to unprecedented highs have served mainly to inflate asset prices and to increase inequality of income and wealth, not yet strong economic growth, full employment and increased price inflation—a “Liquidity Trap” like the 1930s.
As a consequence of shifting thrust to fiscal stimulus in the U.S.—an unadulterated Keynesian deficit and debt-financed fiscal government spending stimulus fully accommodated by essentially zero short-term interest rates—upon a return to a post-Pandemic time whatever growth acceleration and move toward full employment has occurred will be accompanied by unprecedented high deficits and debt relative to GDP.
In the case of the U.S. the fiscal stimulus in 2020 was over $3 trillion, mostly transfers, approximately 10% to 15% of GDP. This was an unheard-of magnitude associated with U.S. Government debt relative to GDP of over 130%, a record-high. Yet another $1 trillion-or-so of stimulus is likely in 2021, bringing the total to almost 25% of GDP over two years and the debt-to-GDP ratio perhaps to 150%.
* Chief Global Economist and President; Decision Economics, Inc. (DE), article printed in The International Economy, Winter 2021, pp. 33-34.