Time for a Selective Debt Jubilee
Debt is a
dangerous instrument. For far too long, the world has used it to avoid
necessary decisions. In the midst of an unprecedented global crisis,
something will have to give. A column by Willem H. Buiter.
«The Covid-19 crisis will leave many private and public borrowers saddled with unsustainable debt.»
The Covid-19 crisis will leave many private and public borrowers saddled with unsustainable debt. We are still in the «pre-Keynesian» supply-shock-cum-derived-demand-shock phase of what is likely to be a global depression. But once the virus is mostly vanquished, households will engage in precautionary saving, and businesses will be reluctant to commit to capital expenditures, driving a further decline in aggregate demand – the Keynesian phase. Deficit-financed fiscal stimulus, monetized where possible, will probably be the only tool capable of closing the output gap.As the issuer of the world’s dominant reserve currency, the United States faces fewer constraints than other countries on the federal government’s ability to borrow and to monetize public debt. Its economic-policy response so far – the Coronavirus Aid, Relief, and Economic Security (Cares) Act – earmarks $2.3 trillion for income support, grants, loans, asset purchases, and other guarantees. According to the Congressional Budget Office, the legislation will increase the federal deficit by «only» around $1.7 trillion over the next decade. The difference reflects the $454 billion set aside to fund guarantees for emergency lending facilities established by the US Federal Reserve, on the assumption that these guarantees will never actually be called upon.
If only it were so. Another $3 trillion fiscal bill, recently passed by the Democratic-controlled US House of Representatives, will likely be adopted in some form by the Senate, and still more stimulus may follow after that. Lawmakers are realizing that, even in the US, many state and local governments will not have the means to weather the crisis without the benefit of debt and loan guarantees or direct transfers from the federal government.
Will Italy crash out of the euro?
What’s true in the US is true everywhere: government programs to support economic activity will lead to an explosion in public debt and private debt owned by the public sector. In the eurozone, an existential crisis is looming, owing to a controversial recent ruling by Germany’s Federal Constitutional Court and the unwillingness of the eight New Hanseatic League member states to contemplate public-debt mutualization. The European Union’s new €240 billion ($263 billion) Pandemic Crisis Support mechanism is small potatoes, amounting to just 2% of eurozone GDP. Without more EU support, Italy may soon face the unpleasant choice of crashing out of the euro or remaining in without being allowed to implement the fiscal stimulus it needs....
....MORE
