Debt damage

The economic situation as in Bob Dylan’s song: There will be heavy rain. It is clear that life will not be easy at the end of this year. We in Europe will be watching Germany, where GDP will fall by 0.4% this year, and growth is expected to reach 0.7% in 2024, half of the 1.3% expected by the German government.

Monetary policy will be at the forefront. Inflation will take a long time to be tamed: it has fallen, but is still far from 2%; Therefore, there are no conditions for lowering the interest rate to the highest level in more than 15 years, which harms investment and makes financing the budget deficit expensive, which hinders the use of fiscal policy.

More when rgThe difference between the interest rate and the growth rate, those kabbalistic calculations, is close to zero as it is now. The interest on public debt equals the growth of the product, meaning that the ratio of public debt to the product increases if there is a budget deficit. Thus, combating a potential recession without harming the debt ratio, which is already generally high, is left to monetary policy, which itself has its hands tied.

Usually, we are like in Besnard’s film: the situation is dangerous, but not desperate. However, when long-term interest rates are high by themselves, tomorrow is not the day before things end. One eye will be on interest and the other on debt.

Life outside the union is not easier. The UK is seeing inflation at 6.3% with the highest interest rates in 15 years, and it has remained stagnant in the third quarter, which will extend into 2024 if the Bank of England is to be believed. This year, debt exceeded 100% of GDP and is growing.

In Japan, 8% of the budget goes to interest on debt. Even the US economy, which appears to be an oasis, faces a complex long-term situation: if inflation falls to 3.7%, the unemployment rate is less than 4%, and GDP growth in the fourth quarter, on an annual basis, is 4.9%, i.e. budget. The deficit in 2023 is 6.3% of GDP, clearly unsustainable for a year of full employment – ​​the US economy has been drugged and addicted to deficits (says Chairman of the Committee for a Responsible Federal Budget), but it has to do. Stop or there will be an overdose of public debt, which now stands at 123% of GDP.

If little is done, unsustainable fiscal policy in the long run will translate into inflation, with one advantage: as Bonner and Wiggin warn in their book. Debt empire From 2005: “At some point, inflation will burn through America’s debt.”