The World Is Drowning in Debt
The comments below are an edited and abridged synopsis of an article by Daniel Lacalle
Global fiscal support in response to the current crisis will be more than $9 trillion, approximately 12% of world GDP. The chain of stimulus plans will distort public finances in a way we have not seen since WWII. The increase in public spending and the decrease in output will lead to a global government debt of close to 105% of GDP.
Adding government and private debt will make it about $200 trillion of debt, a global increase of over 35% of GDP, well above the 20% seen after the 2008 crisis, and all in a single year.
This increase in indebtedness is not going to prevent economies from failing. The main problem with this global stimulus is that it is supporting bloated government spending and artificially low bond yields. That is why such a massive global monetary and fiscal response is doing nothing to prevent the collapse in jobs, investment and growth. Most businesses, small ones with no debt and no assets, are being wiped out.
Most of this new debt has been created to sustain a level of public spending that was designed for a cyclical boom, not a crisis, and to help large companies that were already in trouble in 2018 and 2019, the so-called ‘zombie’ companies.
The percentage of zombie companies—those that cannot cover their debt interest payments with operating profits—has exploded in the period of giant stimuli and negative real rates, and the figure will skyrocket again.
That is why all this new debt is not going to boost the recovery; rather, it will likely prolong the recession.
Lacalle discusses debt (it’s neither free nor irrelevant); the countries that will fall the least and recover first; the enormous indebtedness resulting from the disconnection between financial markets and the real economy; the ECB, the Fed, the Bank of England and the Bank of Japan.
It all looks harmless if the bubble expands and the placebo effect works, but if macro, earnings and employment data remain disappointing, the next crash may be worse than the economic shutdown, because it may add a financial crisis to the already weak economy.
Unfortunately, when the next crash happens, governments and central banks will tell us that more stimulus is warranted.