As government debt soars, you have to pinch yourself to remember that only 10 years ago investors worried that western government bond markets were shrinking so fast that they might disappear. The US wondered if it should retire the 30-year bond. There was even talk that triple A rated corporate bonds would eventually replace Treasuries as global debt benchmarks. Indeed, in 2000 net global issuance of government debt was a mere $250bn. This year alone the UK will issue a third more than that; eurozone governments almost six times as much.
It has been an open question how long this can continue before investors go on strike, rising indebtedness saps economic growth and inflation takes off. But now, from the economists who wrote the book on the impact of financial crises on public finances, comes a suggested answer – and a warning.
After examining the record of 44 countries over 200 years, Kenneth Rogoff, former International Monetary Fund chief economist, and Carmen Reinhart, a colleague, found little link between rising public debt and higher inflation in developed countries. That should soothe the inflation anxiety of some investors. They also found little relationship between debt and economic growth – so long as gross public debt stayed under 90 per cent of gross domestic product. That gets the US and the UK, with debt to GDP ratios of 84 per cent and 72 respectively, off the hook for now.