The coronavirus crisis will push sovereign-debt burdens into new territory
THIS IS NO time to fret about government debt. While cases of covid-19 soar and economic activity grinds to a halt, governments are right to throw all the resources they can at efforts to limit the pandemic’s human and economic costs. This urgency notwithstanding, the crisis will push sovereign-debt burdens into new territory. Over the past century, major global crises have often led both to large-scale borrowing by governments and to changes—often radical—in the way they handle their creditors.
The results were disastrous. Austerity undercut economic growth: output in 1928 remained below that in 1918. As a consequence, debt continued to rise, reaching 170% of GDP in 1930. Remarking on the bitter experience, John Maynard Keynes noted that “assuredly it does not pay to be good.” Other economies, forced into more desperate measures, fared even worse. Germany, weakened by war and unable to meet its debt obligations, sank into hyperinflation.
The effect was to force domestic institutions and households to lend to the government at below-market rates. As wartime price controls were relaxed, inflation rose to relatively modest levels and the rate of interest on government debt, adjusted for inflation, turned negative, and remained so for much of the ensuing decades.
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