“If something cannot go on forever, it will stop.” This is known as “Stein’s law”, after the late Herbert Stein, former chair of Richard Nixon’s Council of Economic Advisers. Stein published this in June 1989, in reference to US trade and budget deficits. They have still not stopped! But, as a German adage of similar import says, “trees don’t grow to the sky”. At some point the tree’s weight becomes unsupportable. This is also true of fiscal debt. Limits on debt exist for every economy, even one as mighty as that of the US.
In a recent blog on “The Fiscal and Financial Risks of a High-Debt, Slow-Growth World”, Tobias Adrian, Vitor Gaspar and Pierre-Olivier Gourinchas elucidate the dynamics of today’s global situation. Overall, they note, debt sustainability depends upon four elements: primary balances, economic growth, real interest rates and debt: “Higher primary balances — the excess of government revenues over expenditures, excluding interest payments — and growth help to achieve debt sustainability, whereas higher interest rates and debt levels make it more challenging.”
The global financial crisis that hit in 2007 and then the pandemic of 2020 and its aftermath caused huge jumps in ratios of public debt to GDP in high-income and emerging economies. By 2028, these are forecast to reach 120 and 80 per cent respectively. In the former case, these are the highest ratios since the second world war. In the latter case, these are the highest ever.