Why governments are 'addicted' to debt | FT Film

Summary

In today's world, governments are heavily dependent on borrowing, with global sovereign debt levels reaching alarming heights. This intricate Financial Times film delves into the complexities of government debt, highlighting its comparisons to post-World War II levels, and discusses the politically tricky nature of high public debt to GDP ratios. The film features insights from economists, investors, and market strategists on the impending risks of debt accumulation, interest rate spikes, and the role of bond markets. As countries grapple with economic crises, rising inflation, and geopolitical tensions, the conversation turns to solutions like budget deficit rebranding and the potential reliance on central banks' interventions to stabilize economies.

Highlights

• Global sovereign debt has reached staggering levels, reminiscent of post-WWII metrics. 🌍
• Bond markets are the 'arbiters of fiscal discipline,' impacting borrowing costs and economic strategies. 🔍
• DTerrifying inflation threats make bonds less attractive, likened to kryptonite. 🦸‍♂️✨
• Japan manages its high debt through low-interest policies, unlike other nations struggling with inflation. 🍣
• US fiscal policies and deficits play a critical role in global economic stability and bond market behavior. 🇺🇸

Key Takeaways

• Governments around the world are heavily reliant on debt, with levels comparable to post-WWII times. 💸
• Bond markets play a crucial role in determining fiscal discipline and economic stability across nations. 📉
• Inflation and interest rates are significant factors influencing government borrowing costs and investment attractiveness. 📈
• Different countries respond uniquely to debt challenges, with Japan maintaining high debt levels through stagnation and low-interest strategies. 🗾
• The US, with its towering deficits, is pivotal in global economic dynamics, influencing investor confidence and fiscal policies. 🇺🇸

Overview

Debt has become an indispensable tool for governments worldwide, drawing parallels to the financial pressures faced during post-WWII rebuilding. Despite different strategies, the underlying story remains the same: economies are navigating an intricate dance with debt, inflation, and market stability. Developed nations find themselves in a cycle of borrowing that seems vital yet fraught with dire peril.

The interplay between bond markets and government fiscal policies is fascinating. Countries must balance the need for public spending against the ever-watchful bond market vigilantes. These markets serve as guardians of economic stability, applying pressure to governments that exceed their borrowing comfort zones. From terrifying inflation to hopeful fiscal rebranding, the film portrays this as a high-stakes economic chess game.

At the heart of this global debt conversation lies the US, wielding the most significant influence over economic tides. Its fiscal policies are pivotal, with deficits reaching extraordinary levels amidst economic and political shifts. As nations grapple with financial challenges, innovative solutions and historical lessons are crucial to navigating the treacherous waters of debt management.

Chapters

• 00:00 - 00:30: Introduction The introduction chapter discusses the concerning issue of government borrowing, highlighting it as the most significant financial problem currently. It points out the addiction of governments globally to debt, noting how sovereign debt levels have grown exponentially. Particularly in developed countries, the public debt to GDP ratio mirrors the levels seen in 1945, presenting a daunting political challenge. The chapter emphasizes the urgent worry posed by exploding debt levels.
• 00:30 - 01:00: Investor Concerns This chapter discusses the concerns of investors regarding potential defaults and major economic crises. The focus is on the bond market and the point at which it might collapse. The chapter highlights the fear of bond yields rising to levels that could severely damage the economy, driven by what's referred to as 'bond vigilantes.' It also touches on the power of central banks in counteracting market pressures.
• 01:00 - 01:30: Global Debt Levels The chapter discusses the global issue of high levels of government debt, which has become normalized in many countries. Except for Germany, many nations including the US, Japan, Canada, Italy, and France, have borrowed large sums relative to their GDP. This widespread borrowing is depicted as an addiction to debt.
• 01:30 - 02:00: Cycle of Borrowing The chapter discusses the persistent issue of government debt and deficits in major economies like the US and China. The current trend involves borrowing money to resolve economic troubles and then requiring more borrowing to pay off the previous debts. This creates a seemingly endless cycle of borrowing with no apparent solution in sight in the major developed countries.
• 02:00 - 02:30: Causes of High Debt The chapter "Causes of High Debt" discusses the current levels of debt relative to GDP, which have reverted to levels seen in 1945. Several major global events have contributed to this increase, including the global financial crisis, the COVID-19 pandemic, and the war in Europe. These events necessitated government intervention, where they acted as insurers of last resort. The aftermath of COVID resulted in a global spike in inflation and rising interest rates, subsequently raising the cost of servicing government debt.
• 02:30 - 03:00: Inflation and Debt This chapter explains that GDP levels are around 100%, matching the amount of debt these economies annually produce. The projections show a continuous rise in this debt, which could become explosive. Olivia Blanchar, a professor at MIT who took leave to join VMF in 2008, is introduced. She gained experience dealing with the global financial crisis and Euro crisis. The chapter also touches on how several countries are addicted to debt and suggests that this issue is widespread and can affect any country.
• 03:00 - 03:30: Deficit and Surplus In the chapter titled "Deficit and Surplus," Ray Dio, founder of Bridgewater Associates, discusses macroeconomic principles related to national debt. As debts and their associated interest payments grow, the resulting debt service obligations can limit other forms of spending. This becomes particularly problematic when new borrowing is required to meet these debt service payments, potentially leading to a vicious cycle. The chapter explores how bonds operate as IOUs issued by governments within this context.
• 03:30 - 04:00: Public and Private Debt The chapter 'Public and Private Debt' discusses the structure and functioning of bonds. It explains how investors lend money for a certain period with the expectation of getting it back, along with regular interest payments known as coupons. The varying maturities and coupon rates of different bonds can make comparisons challenging, so yields are used as a basis for comparison. It is noted that bond yields have an inverse relationship with prices and generally, governments aim to prevent yields from rising.
• 04:00 - 04:30: Monetary Policy and Spending The chapter discusses the impact of rapid changes in monetary policy on borrowing costs and the economy. It highlights the importance of having strong buying support for bonds, noting that one person's debt is another's asset. The attractiveness of holding debt is essential to prevent issues like the 'debt death spiral,' where fear leads to the selling of debt. This situation has been a concern, with warnings that it may be escalating out of control.
• 04:30 - 05:00: Challenges in Developed Economies The chapter discusses challenges in developed economies, focusing on the issue of government borrowing and its impact on investment strategies. Karen Wood, Chief Market Strategist at JP Morgan Asset Management, highlights the growing concern among investors regarding government bonds and borrowing levels. She emphasizes the critical nature of these issues, given her role in advising clients on global economic trends and investment decisions.
• 05:00 - 05:30: The Role of the Bond Market The chapter titled 'The Role of the Bond Market' explores the importance of government debt as a safe haven asset and a fundamental part of a financial portfolio. Greg Peters, the co-chief investment officer of PGM Fix Income, highlights the challenges posed by inflation to bond investing. Rising inflation is depicted as detrimental to bonds, likened to kryptonite, due to its negative impact on protecting the overall portfolio.
• 05:30 - 06:00: The US Debt Situation The chapter discusses the complexities of the U.S. debt situation, highlighting how government bonds, traditionally seen as safe havens for investors, are impacted. The conversation touches on how inflation and debt management are influencing investor returns and confidence. It acknowledges situations where increasing debt is justified, such as wars or pandemics like COVID-19, contrasting this with how some countries have handled debt inappropriately.
• 06:00 - 06:30: Global Currency and Debt The chapter explains the global addiction to debt, primarily driven by an extended period of zero or negative interest rates, which essentially promoted borrowing. Stephanie Kelton, an economics and public policy professor, is featured in the discourse, highlighting how the financial ecosystem has been conditioned to accept debt as a norm due to its historically low costs. Through interactions and experiences with financial audiences such as hedge funds and investment banks, Kelton conveys the broader narrative on the impacts of prolonged low interest rates on global debt habits.
• 06:30 - 07:00: Japan's Approach to Debt The chapter titled 'Japan's Approach to Debt' discusses the common concerns about budget deficits and national debt, as reflected by audience reactions during a presentation. The chapter highlights that the United States has been operating under government deficits for a long period, contrasting with surpluses observed in other parts of the world and the US private sector. The speaker suggests that eliminating the government deficit would lead to the removal of these surpluses, indicating a complex interplay between public deficits and private or international surpluses.
• 07:00 - 07:30: Debt and Economic Stability The chapter discusses the concept of government deficits and their role in creating economic stability. The speaker, Russell Napier, an adviser to investment institutions, highlights the positive aspects of government debt, stating that it allows the private sector to save by creating a surplus. He mentions that while government borrowing can be problematic if excessive, it serves a useful function by balancing economic scales. Additionally, Napier is introduced as the keeper of the Library of Mistakes, a unique business and financial history library in Edinburgh.
• 07:30 - 08:00: European Debt Issues This chapter examines the issue of European debt, focusing on the interconnected challenges of both public and private sector borrowing. It discusses how high government debt to GDP can be viewed differently depending on the level of private sector debt. The text underscores the significance of private borrowing, suggesting that it can be as problematic as government debt, particularly when significant issues in the private sector lead to a sharp rise in government debt. The narrative links these debt dynamics to the period after the financial crisis up until the pandemic.
• 08:00 - 08:30: Germany and Debt The chapter discusses the economic situation in Germany and the emergence of inflation post-pandemic. Initially, there was concern about inadequate demand and deflation, leading to aggressive monetary policy aimed at stimulation. However, inflationary pressures have since emerged and appear strong. The chapter also touches on the role of government spending in the political system and the implications of taking on credit to fund public expenditure.
• 08:30 - 09:00: Italy and Fiscal Responsibility The chapter discusses the concept of credit leading to debt and the measures taken over the past decade to address this issue. Primarily, there has been a reduction in spending in other areas to manage debt. However, this has resulted in underinvestment in public services and infrastructure. This situation places pressure on governments in Western countries to compensate for the lost spending during the austerity period.
• 09:00 - 09:30: Debt Cycle Concerns The chapter discusses the various pressures on the economy, including weak economic growth and slow-growing tax revenues. There is concern over global security and the potential for conflict reminiscent of World War II, increasing the priority of defense spending. Additionally, challenges such as an aging population and the need for a transition to greener energy sources are highlighted. This transition will likely require public support to accelerate. Interest rates are also expected to remain high, adding to the economic strains.
• 09:30 - 10:00: Future of Government Debt The chapter explores the contemporary challenges faced by governments in managing debt. It highlights the normalization of crisis-level borrowing by governments, particularly in a low-inflation environment where bond investors are willing to provide continuous funding. However, the chapter cautions that if inflation increases, this model will become unsustainable as supply and demand pressures converge.

Why governments are 'addicted' to debt | FT Film Transcription

• 00:00 - 00:30 Government borrowing is the biggest issue in finance today. Governments around the world are addicted to debt. The sovereign debt levels globally have just grown exponentially. In the case of the developed countries, the average ratio of public debt to GDP is now back to where it was in 1945. That's rather striking. It's politically impossible to solve. Exploding debt is a real worry. If
• 00:30 - 01:00 you're an investor, you start wondering what's going to happen and whether there's going to be that default. The music stops when you get a major crisis. The big question is at what point does the bond market break. We just don't want the bond yield to get up to a point where it crushes the economy cuz then the bond vigilantes will have taken their vengeance. A determined central bank can always override any market pressure. I think bone investors should be [Music]
• 01:00 - 01:30 terrified. Let's face it, the world is addicted to debt. Pretty much every country, okay, leaving Germany aside, has very large amounts of government borrowing. We've started to take it as so normal now that governments borrow enormous amounts of money relative to their GDP. The US, Japan, Canada, Italy, France, all of these countries have very high debt levels by historical
• 01:30 - 02:00 standards. Wherever you look, you see problems of government debt or deficit. The US, where the deficit is about 7% of GDP, China also has a very large deficit. It's a playbook that we've seen going back at least to the global financial crisis. You borrow your way out of trouble and the way that you pay for that borrowing is more borrowing. And we don't seem to have a way out of this cycle at the moment, at least in some of the the biggest economies in the world. In the case of the developed countries, the average ratio of public
• 02:00 - 02:30 debt to GDP is now back to where it was in 1945. That's rather striking. A great deal of this has to do with huge shocks. So the global financial crisis, then we had COVID, then we had war in Europe and each time governments have found quite correctly they need to be as were the insurers of last resort. Following COVID, we had this global spike in inflation, interest rates going through the roof. That means much much more expensive debt servicing costs, debt interest costs for government. debt to
• 02:30 - 03:00 GDP levels are roughly 100% so the same amount debt as these economies produce every year. The projections are they rise rise and rise to the point where it gets a bit explosive. My name is Olivia Blanchar. I've been a professor at MIT all my life but I took a leave to go to VMF. I joined in 2008. I had to deal with the global financial crisis and then the Euro crisis. There's a number of countries which are addicted to that. And I think the disease can hit any
• 03:00 - 03:30 country at any time. I'm Ray Dio. I'm the founder of Bridgewater Associates, the largest hedge fund in the world. I'm a global macro investor. When debts accumulate and interest payments accumulate, the debt service payments squeeze other spending. And it's a particular problem when there is a need to borrow money in order to make debt service payments and the spiral begins. Bonds are effectively an IOU. It's a way that the government
• 03:30 - 04:00 can say to an investor, okay, you lend me this amount of money for this amount of time and I will give it back to you after that amount of time and in the interim I will pay you interest payments called coupons. Now, because there are loads of different bonds, they've all got different maturities, they've all got different coupons attached to them, it can be a little bit difficult to compare apples with apples. So, to do that, what we do is compare the yields that are available on bonds. Yields go up when prices go down. What governments generally don't want is for yields to go
• 04:00 - 04:30 up too quickly or too fast cuz that jacks up borrowing costs for everybody around the country. That's why you need a good bedrock of support of buying support for bonds. One man's debts are another man's assets. So in order to hold the debt, it has to be attractive. Then there is what some people call the debt death spiral, which means that there's selling of debt when there's worry about that. People have been warning that this is getting out of
• 04:30 - 05:00 control. That drum beat is definitely getting louder now. We have seen the odd episode where it's looked like investors are saying, "We're not buying any more of your bonds." That's when people start to get really jumpy. I'm Karen Wood. I'm the chief market strategist at JP Morgan Asset Management. So, my job is to advise clients on what's going on around the world and help them make the best investment decisions. The level of government borrowing is certainly one of the top questions I get asked amongst
• 05:00 - 05:30 clients today. Government debt is supposed to be our safe haven asset. It's supposed to be the bedrock of our portfolio. It's supposed to be the boring bit. I'm Greg Peters, co-chief investment officer of PGM Fix Income. From a bond investing standpoint, what I worry about is inflation, right? Uh and so inflation on the rise is just so difficult from a overall portfolio standpoint to protect yourself. Bonds hate inflation. It's like kryptonite for
• 05:30 - 06:00 them. they they just can't live with it because it eats into their returns. In a world where we're also being met with inflation shocks, then the role of government bonds as that safe haven diversifier that many investors look to um isn't quite so clear. There are times when you know an increase in debt is completely justified. Wars or preparing for wars or COVID, these are cases where you have to spend more. What we have seen in many countries is not that. It's
• 06:00 - 06:30 basically just tomorrow is another day type behavior. The world has been addicted to debt because debt has been for free. So we're coming out of this zero negative interest rate world where there's been nothing but encouraging taking on more debt. I'm Stephanie Kelton and I'm a professor of economics and public policy at Stony Brook University. I do a lot of public speaking, finance, hedge fund, investment bank. That's my crowd. I can pull them before I go in and say, "How
• 06:30 - 07:00 many people think we should be reducing budget deficits?" Almost every hand goes up. How many people are worried about the national debt? Almost every hand goes up. When I put this graph up, everything changes. This is the United States of America. The government has been running deficits for virtually my entire life. but look up and they see surpluses in the rest of the world and surpluses in the US private sector. If you want to eliminate the government deficit, you're going to erase all of the other surpluses because the one is
• 07:00 - 07:30 creating the other. The government deficit is doing something very useful, which is creating a surplus, allowing the rest of us to net save. Their red ink is our black ink. My name is Russell Napier, an adviser to investment institutions. One of my joys is also to be the keeper of the library of mistakes, a business and financial history library here in Edinburgh. There is an issue with there being too much borrowing in the government sector, but
• 07:30 - 08:00 it has to be seen in conjunction with too much borrowing in the private sector. If we lived in a country where government debt to GDP was high, but the private sector debt to GDP was low, then the consequences of this government debt addiction would actually be quite different. Private borrowing and private debt and private markets are in my view just as big a problem. Really big private busts cause explosion of government's debt. after the financial crisis until the pandemic and really a
• 08:00 - 08:30 year or two after the pandemic. All we were worried about was inadequate demand and deflation. That was a world in which monetary policy was aggressively stimulative. Inflation has come back and inflationary pressures seem quite strong. When you're dealing with government's requirements in the political system, there's a desire for spending. when you get credit um and you can hand things out on credit at that
• 08:30 - 09:00 time it's better credit produces debt. One of the ways we tried to to deal with that situation for the last decade was to try and cut back on other areas of spending. But that's actually left us with a new problem. We haven't been committing enough to public services, public infrastructure. And you can see that the pressure is on governments around the west to, if you like, make up for the loss spending that happened during the decade of austerity. You've
• 09:00 - 09:30 got all these pressures which are building up. We've got quite weak growth. So you don't have hugely rapidly growing tax revenues. You're gambling with World War II, a more uncertain global security world. Defense is going to become more of a priority, not less. An aging population. There's a green transition. Now, a lot of that needs some sort of public support to make it happen faster. And we're likely to see interest rates much higher than they
• 09:30 - 10:00 were before. And that adds an additional burden. And we've now got to the point where it's pretty normal for governments to borrow on a kind of crisis pace every year. In a world of low inflation, you can get away with this. Bond investors will fund you and fund you and fund you. But in a world where it is not likely that inflation stays low, that is when time is called upon the whole thing. You know, supply and demand are running headlong into each other.
• 10:00 - 10:30 The bond market was the ultimate arbiter, right, of fiscal responsibility. The bond vigilantes, so to speak, step in and actually focus the mind of politicians. I'm Ed Yard Denny. I'm the president of Yard Denny Research, focusing on global macroeconomic and financial markets. I've been doing this for over 45 years. And uh well, I first wrote about the bond vigilantes in July of 1983. And during the 1970s, uh, bond investors
• 10:30 - 11:00 got killed. Inflation soared and bond yields went up dramatically. And I argued that if the fiscal and monetary authorities were not going to maintain discipline that the bond vigilantes would take over and they would push bond yields up to levels that it could slow the economy down and bring inflation down. We just don't want the bond yield to get up to a point where it crushes the economy cuz then the bond vigilantes really will have taken their vengeance. We've seen all this rise in debt without the bond vigilantes stopping it with a
• 11:00 - 11:30 few exceptions. So what did we see in 2022 in the UK? The bond markets decided that the Liz Trust government didn't have a clue. Our gift to the world is showing everyone what can go wrong if you push the bond market too far. Mr. Speaker, I am a fighter and not a quitter. Bond investors talk about Liz trust moments. As we all remember back end of 2022, Liz Truss and her chancellor Quasi Cuang effectively blew
• 11:30 - 12:00 up the guilt market. Prices fell incredibly quickly triggered a lot more very aggressive selling and it all got out of hand very quickly and it took the Bank of England to to steady the ship. Governments around the world live in dread of doing that to their bond markets because immediately you could see in the UK during that episode that borrowing costs went through the roof. People's mortgage costs went through the roof. bond markets matter in real life cuz it really hits the average household in the pocket pretty hard. The UK is,
• 12:00 - 12:30 you know, front and center in many respects uh around the concerns of debt sustainability. So, I don't think it's particularly a fiscal credibility problem here in the UK. There are questions over the long-term growth prospects here. We don't want to get this out of proportion. There isn't a UK markets crisis happening right now like what we saw two or three years ago with Liz Trust. This government inherited quite a
• 12:30 - 13:00 relatively tight fiscal position. Maintaining fiscal tightness is going to be very difficult because the pressures for spending are just so strong. The big question is when the big boy here the US which has the biggest deficits has completely unsustainable debt profiles. When do the bond vigilantes take against the US? The US is really at the heart of this entire issue. It's the lynch pin of the global economy. It's bond market is
• 13:00 - 13:30 worth more than $20 trillion. It has a bigger deficit than most western countries. And then you have Donald Trump coming into office. Worst case, you're looking at 10 years forward 160% debt to GDP. That is a eye popping staggering number. The US federal government spent $880 billion on debt interest last year. That's four times the level of a decade ago, and it's more than they spend on the military, almost as much as they spend on health. If the
• 13:30 - 14:00 way that you pay for debt is to issue more debt, you're vulnerable to a rise in interest rates. And that's exactly what's happened. It's approaching 25% of all revenues just to pay back the debt. And that is the classic debt trap, right? It's a hole that you can't dig out of uh and you can't inflate your way out. Well, the US is running an enormous deficit about 6% of GDP which in peace time at full employment remember is extraordinary. I mean it's absolutely
• 14:00 - 14:30 enormous. And the trajectory for US debt if you look at standard forecast I mean it's very very disturbing since it's the most important country with the most important currency. the projected um amount of debt that has to be sold which equals the deficit is 7 and a half% of GDP and at existing interest rates that raises also debt service a lot. So it's right at that precipice. I think the way
• 14:30 - 15:00 that you address this issue is you make a um bipartisan cross party lines commitment to 3% of GDP. People are so conditioned to hear the word deficit and think it's a pjorative. And what I think we have is a linguistic problem. We're using words like deficit and debt to describe things that are really quite benign. When people say they're very worried about the government deficit, what they're saying is, "I'm very worried about the financial surplus
• 15:00 - 15:30 that's in the non-government part of the economy." Call it the net contribution instead of the deficit. Call it the cumulative net contribution instead of the debt. The temperature would come down a lot if people understood that the thing we're fighting over is our financial surplus and our savings account. the Trump administration uh once once they realized that they were going to go into the White House, they had to at least make some effort to satisfy the bond vigilantes. And so
• 15:30 - 16:00 suddenly we have the Doge Department, the Department of Government Efficiency and they're also going to address the the deficit. So we've got a $2 trillion deficit and if this if we don't do something about this deficit, country is going bankrupt. Maybe this department of government efficiency which Musk is supposed to head will somehow find enormous savings which will be enacted. I'm very very skeptical that there's
• 16:00 - 16:30 anything there which will be be big enough to offset likely tax cuts. Elon Musk was kind of I think it was asked during the campaign how much do you expect to cut off uh from the deficit? And he right away blurted out $2 trillion. even he's backed off on that. I'm skeptical that Musk will be able to reduce spending sufficiently to decrease the deficit by any substantial amount. It would take some hiccup in bond markets in the treasury market to
• 16:30 - 17:00 actually lead Congress uh to be slightly more responsible. The US is crucial to the global financial system. The dollar is the world's currency of trade, of crossber debt. People in other countries, big investors, central banks, they need to hold dollars. That means they need to buy US government debt. It's the benchmark safe asset for the whole world. Now, that has enabled the US government to be more free spending than most others. Maybe the type of crisis that we've seen in the UK or in
• 17:00 - 17:30 the Euro zone a decade and a half ago could eventually come to the bond market, the economy that is at the center of all of this. It could be really the most significant fiscal monetary problem in the world and it could trigger destabilizing events in financial markets. I did see a post from President Trump, two words all caps, balanced budget with tax cuts and a lot of spending on border and other things. I think it's more likely than not that we'll see large deficits continue. On
• 17:30 - 18:00 the flip side, we've also seen with a country like Japan that you can have very very high government debt levels for a very long time and really like nothing bad happens. The key to Japan's success, if you like, is that their very high debt levels have been accompanied by economic stagnation where the central bank keeps interest rates very low and also does quantitative easing where it buys up all of the debt. So, it doesn't really enter the market and you have the currency depreciate by 4% a year. So you lost
• 18:00 - 18:30 about 70% relative to US bonds. It's going to be a bad deal. The bond vigilantes, if we want to be honest, they're the central bankers. A determined central bank can always override any market pressure to move yields higher. As the Bank of Japan has clearly demonstrated, the unique thing about Japan is that the creditor of the Japanese government is the Japanese
• 18:30 - 19:00 people. They've been prepared, it's mostly the corporate sector, to hold Japanese government debt with zero yields despite inflation. The Bank of Japan is a highly trusted institution. I wouldn't be surprised if there were problems at some point, but they do have the most trusting and most solvent creditors in the world, mainly themselves. For the most part, this is a western problem. This is a problem in developed economies. But if you look at a country like China for
• 19:00 - 19:30 example, a lot of people now are drawing parallels between China's economy and Japan's 10, 20, 30 years ago talking about demographics, aging populations, debt levels going up. You look at the debt levels uh in China, it's staggering. Um and I think that has real implications. It's a closed system. Uh they they're not growing in the same way that they have before. the remedies just aren't really available. You could be seeing a situation there where where
• 19:30 - 20:00 these kind of existential worries about debt become um become an issue too. The Euro zone's public finances are rather stronger than those in the UK or the US or Japan. But the Euro zone is not a cohesive picture by any stretch of the imagination. Italy is one of the biggest borrowers, if not the biggest borrower in the Euro area. France just politically has a really difficult time reigning in spending and in France there are plenty of issues uh that we have to
• 20:00 - 20:30 confront including uh the deficit and the debt and so I'm involved in those discussions. The debt level is high but it's increasing and that's what worries me. I think we have to at least stabilize the ratio of debt to GDP and that's a big number. I mean to do this under the best assumptions that I can make it's 150 billion that we have to uh find in the current political environment that's absolutely impossible. It may well require the kind
• 20:30 - 21:00 of crisis which makes people sit down and be willing to accept cuts u and without it I'm not sure we'll get there. You've got an additional element here which is Germany, the poster child for limited spending, limited borrowing, one of the safest and frankly most boring bond markets on Earth. Germany's new chancellor has reached a historic deal to spend hundreds of billions of euros on defense and on infrastructure. Now,
• 21:00 - 21:30 this is a huge change. We're talking about uh an economy that has historically been very reluctant to borrow heavily. So in a sense, Germany is belatedly joining the global debt party. They need more domestic demand and the private sector has runs a huge surplus in Germany. Doesn't generate demand adequately. Has to spend a lot more on defense. We all know it. It growth is very slow. It needs a lot more public sector investment. Investment has been very weak. If you need a defense build up, you need to borrow. That's
• 21:30 - 22:00 what governments are for. Whilst the rest of the world have been spending whether that's checks in the post in the US during COVID huge support for industry like we've seen in China supporting its electric vehicles. We haven't seen the same behavior in Germany but it's paid the economic price for its prudence. uh is really struggling to compete with some of those car producers in China that thanks to those subsidies have reached massive
• 22:00 - 22:30 economies of scale. The consumer in Germany not having had those checks in the post is much more cautious hasn't been spending. The investment community has been crying out to Germany to borrow for the last decade and a half. They've been reluctant to do so. Now that they are, as I say, belatedly joining the party, people are assuming this will be great news for the German economy, great news for the European economy. Debt is not always bad. That's the important thing to remember here. Italy is a bit different from France. It has a high level of debt, but again, between 100
• 22:30 - 23:00 and 130. What you have is a prime minister who actually is fairly responsible from a fiscal viewpoint. One of the reasons is that a lot of money from Brussels is conditional on good behavior. Italy is behaving fairly well. The bond vigilantes have never been potentially more powerful simply because there's a lot more debt. Whether the politicians get the message is a whole another story. We have to get the government deficits down to a level so
• 23:00 - 23:30 the debt doesn't rise relative to incomes. If it's not done like that, you will have a high risk of a financial market heart attack. You just can't say at x% that's when the bond market's going to wake up. That lack of clarity around an exact number is the problem. That's the thing that really worries investors because there's nothing they can do to hedge against it or prepare for it. The big risk is what we saw in
• 23:30 - 24:00 the 70s. The governments that had issued debt in their own currency very rarely default with the Trump administration possibly at the war with the Fed. That could look quite plausible in a year or two. And if that happens then the bond market would certainly break. You get high interest rates, high inflation and in the end inflation wipes out the debt and that should make the investors very worried. Something's got to give. Either bond investors have got to be convinced somehow to just chew down on returns that they really don't want or governments have got to
• 24:00 - 24:30 massively cut their spending. Austerity isn't going to happen. It may be a market uh impulse to go for a debt spiral, but governments would not permit it. These so-called vigilantes are back because they can see a world going forward where there's more inflation. My opinion on the vigilantes is that they will be assassinated. And this is what we did after World War II. We didn't allow the market to determine the price at which pe which the governments would
• 24:30 - 25:00 pay for credit. We forced people to buy government bonds. Keep those yields at rates that any vigilante would consider uh obscenely bad value to prevent the debt spiral and a death spiral. Whether we live in democracies or whether we live in dictatorships, the uh the dictation will be to the vigilantes, not the vigilantes dictating to the governments. There's a real debate between economists. Some people will say the bill is falling due. Something bad is going to happen if we don't cut debt soon. Other people will point out that
• 25:00 - 25:30 actually government finances are not like household finances. You don't have to pay your bills because you you have you control the money printing machine. Problem with that is that it's inflationary. So there's no zerocost way to sort this out. If you don't like the fact that there's a large and growing treasury market, you could always make the decision to stop issuing more treasuries. It's a policy choice. It's not an economic imperative that the government issue securities to match the deficit each year. You don't need to get
• 25:30 - 26:00 rid of government debt. All you need is to stabilize it at some level that your population and your lenders think is reasonable. deficits can be useful when the economy uh goes down, right? There's a recession, then it's clearly a good idea to have a larger deficit, a larger deficit when times are bad and a larger surplus when times are good. Public finances have to be sustainable. The wrong way to get there is have a massive
• 26:00 - 26:30 sudden fiscal shock and tightening. That was the great mistake after the financial crisis with austerity. But we should be sure that they're sustainable and that we should be sure that the public finances support growth. If you simply take the view, let's borrow as much as we can, then you'll find yourself with this problem in the private sector. Now, there are other people in that camp who say, well, that's really easy because we just fund it by printing more money. Well, there's a long long long long history of how
• 26:30 - 27:00 that is disastrous. Now, I know those people will argue that, you know, it will not be like that this time. I think any financial historian finds it exceptionally difficult to see how the government direct government financing by the central bank is anything but heading to very high levels of inflation. But big butt, there are plenty of savings in the world and the government's going to manipulate those savings to to borrow more money. But it's going to borrow that by forcing people to buy those government bonds. I don't think they take the radical approach that some people recommend of
• 27:00 - 27:30 direct funding of the government by the central bank. You don't have to take that risk. The world's full of savings. You can you can abuse the savers long before you have to abuse the balance sheet of the central bank. I can't see a way for governments to snap this reliance on debt. The countries which have large deficits are going to go through tough adjustments. Uh the notion of fiscal rules will come back. No panics. Panics are the worst thing you can do unless you've got an
• 27:30 - 28:00 absolutely overwhelming immediate crisis. Everybody wants more credit. And politicians particularly like borrowing and spending because the paying back comes in somebody else's terms. And if you can increase spending without increasing taxes and get away with it, that's nirvana. And there's only one problem is well, how about the bond vigilantes? maybe they don't want it and maybe they have the power to to stop
• 28:00 - 28:30 that. So there are big debt cycles that go on for 50 or 75 years in which debt is rising relative to the income needed to service that debt. Policy makers need to understand the big debt cycle. Are there limits to debt? What are they like mechanically? Yes, because it will come. Every government deficit is good for someone. Is it a deficit that is resulting from passing tax cuts that
• 28:30 - 29:00 primarily benefit people in the, you know, top of the income distribution? That deficit is going to be very good for that cohort of people. Or is it a deficit that is the result of making investments in your health care system, your education system, your infrastructure that can increase the deficit as well and serve a different constituency. inflating away the debt by stealth over a period of many many years may turn out to be the least worst option here or at least one that allows
• 29:00 - 29:30 politicians to avoid making some very very unpopular decisions. But higher inflation I mean as we've seen in recent years is very unpopular and can also lead to governments being thrown out of office. Inflation has to be unexpected. If inflation is expected then bond yields go up and actually governments don't improve their debt situation. I can't imagine a world easily without government debt. Government debt has been a feature of economies for centuries. The modern financial system in the UK was created with the creation
• 29:30 - 30:00 of the Bank of England and that was there to help the government manage its debt. The government is the the soundest credit and it does long run things. There's nothing wrong with borrowing. It's part of what makes a modern financial system work. [Music]