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Solve Global Debt? Look at Inflation and Sustainability

Inflation and Sustainability
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EDITOR NOTE: Inflation and sustainability are the two biggest buzzwords on the international economic stage in 2021. If inflation skyrockets (as signs point to) and governments and central banks don’t increase sustainability along with it (which it certainly seems like they’re not with current fiscal policy), the results can be catastrophic. Global debt is higher now than at any point in human history and borrowing from tomorrow to pay for today is not a sustainable economic model, especially in this era of uncertainty. The current imbalance of inflation and sustainability is a giant red flag that troubling economic times are on the horizon and all we have to rely on is the hope that banks, governments, and financial institutions do the right thing in terms of sustainability, which there is absolutely no sign of.

Inflation and sustainability are the two key indicators that require special attention today. If the first one rockets sky-high, but the second does not follow, then eventually we will find ourselves in a very expensive world, with large debts, without a program for tomorrow, that, in turn, will inevitably lead us to subsequent corrections. When it comes to inflation, a number of economists and financiers think it is the basis of a healthy economy, somewhat, price and economic growth go hand-in-hand, it cannot be escaped, but if economics develops at the expense of borrowed money, then it is apparent that sustainability is highly topical issue, particularly for people of my generation and our children, because, in the end, the money borrowed yesterday will have to be returned, and it is important that development continues also after the borrowed funds have been spent. The International Monetary Fund, in its article of 27 July 2021 (1), flattened own previously released April report and maintained the projected global economic growth this year at 6.0% and 4.9% next year, while lowering the forecast for developing countries this year and improving it for the advanced economies, which is also a good piece of news for Latvia, since foreign markets performance will also have a positive effect on our well-being. Last year was the year of global borrowing, The Wall Street Journal, in article of July 12, (2) notes that global government debt has reached its highest level since the World War II, many times higher than annual global economic output, and on 17th of February 2021, the Institute of International Finance published calculus that at the end of 2020 it amounted to 281 trillion US dollars (3) or 355% of the global GDP and this figure does not even include this years announcements of public borrowings; therefore, there is quite a logical open question, how sustainable is the “spend-borrow-repeat” approach?

The cost of debt service is the first part of the answer and today the debt service is at the all-time historic low, since central banks place money in the market at almost 0% interest rate, actually, free money is available, however, the question is how long will the central banks continue to do so and when rates will rise, therefore limiting borrowing and raising the cost to refinance. When the above sequence of actions occurs, it becomes obvious that countries with less debt will be much more flexible in their options, and it is vital for us to keep the total debt below 50% of GDP, thus maintaining a strong position in international markets. Countries with debt exceeding the 200% threshold of GDP as of April this year are Japan (257%), Sudan (212%) and Greece (210%), while there are a number of countries with debt exceeding the 100% threshold: Great Britain (107%), Cyprus (113%), France (115%), Spain (118%), Portugal (131%), Italy (157%) and many more. Over-borrowing is not sustainable, while productivity-enhancing borrowing is absolutely welcomed, since borrowed funds are spent not for social purposes, but for economic growth, and some money from economic growth can be invested afterwards in social programs.

Facing pandemic for mankind raises high market uncertainty, actually economists do not make market forecasts for the medium term or for the coming years or do so with many conditions that the forecast itself loses its value. One of the top main reasons is that we still don't know when the virus will stop its impact on our everyday life. The World bank in its June report on the global economic outlook (4) points to strong but uneven economic growth of 5.6% this year, the highest in the last 80 years, with strong concentration in some major economies and a forecast that 90% of the developed economies will, by 2022, recover the pre-pandemic per capita income, i.e., virus payoff on the time axis is about two years for developed economies to return to pre achieved 2019 levels. In summary, the high and growing public debt burden, inflation, commodity and food price stability, fiscal sustainability and growing inequality are the challenges that global policy makers will need to address in the near future. In conclusion, the key for governments in today’s challenging environment is prudent borrowing and targeted investment of borrowed funds, fiscal discipline and courage to take responsibility and cohabit with the virus in our everyday life, not forgetting about the future, which is already today. Moreover, the future seems rather buoyant, since vast and growing mountain of government debt and simultaneously increasing public spending and investments, eventually, cannot last forever.

Original post from The Baltic Times

All articles are provided as a third party analysis and do not necessarily reflect the explicit views of GSI Exchange and should not be construed as financial advice.

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