// THEMA OUTLOOK 2021
Lots more stimulus needed DOOR JOOST VAN MIERLO
The COVID-19 crisis hit the world at a time when public and private sector debt levels were already at or near historical highs in many areas of the world, including China, Japan, Europe and the United States. Governments responded by issuing a great deal of additional debt. It was the right response. In fact, the world, and in particular the Western countries, may require a great deal more stimulus. Erik Norland is clear. The Senior Economist of the US-based
opportunities to do that because of the second wave of the
CME Group has been warning about the growing debt
crisis.’
mountain in most of the world for years. It has left the world economy dependent on lower interest rates to finance it. That being said, even more stimulus measures are needed to make economies start to grow again.
You say the stimulus was necessary, but you warned about increasing debt in the past. Is that not relevant anymore? ‘Governments have to deal with the biggest problem first.
But not just any kind of stimulus measures will do. What’s
And the economic downturn was an acute problem. It still
needed are measures that ensure that the people who lost
is. The last employment figures in the United States
their jobs will be able to find jobs again. Because only a
showed that the country added over 600,000 jobs in
growing economy will be able to deal with the growing
October, which is great. But the reality is that there are 6%
debt burden. It’s still a problem. There are scenario’s where
fewer people with jobs now than one year ago. Big layoffs
the debt mountain leads to potentially unfavourable
are expected in Europe too as support payments to
outcomes. The best thing would be if debt starts to come
companies wind down.
down gradually relative to GDP. In order for that to happen, GDP will have to rise again and income for lower wage
It’s good to mention that not every country had to issue
earners in particular needs to begin to rise.
new debt to stimulate the economy. Most Western countries did and the same is true for Japan, China and
Did governments have other options beside issuing debt to finance stimulus programs after COVID-19 hit the world?
South Korea. But plenty of developing countries like Mexico,
‘Not in Europe, Japan or the United States, where interest
debt to begin with. They were able to lower that from
rates were already near zero. Near zero interest rates limit
levels like 8-9-10% to 5% in Mexico and 4% in Russia. The
the potential impact of easier monetary policy and place
countries with the largest debt had to increase spending
most of the burden for stimulating economic growth on
and deficits the most. Their budget deficits might reach
fiscal authorities.
unheard of levels between 10% and 20%.’
Doing nothing was not an option. That’s the lesson we learned from the 1930s. Doing nothing could lead to a
You call it an irony, but isn’t it completely frightening?
prolonged and unnecessary economic downturn.
‘There are different ways to look at this. On one side, most
Russia and Brazil were able to lower their official interest rates. The irony is that those countries had a relatively low
countries that are issuing debt are doing it in their own The pandemic caused such an enormous disruption, that an
currency. There’s not an immediate concern. The borrowing
immediate response was needed. Most governments
capacity of a country like the United States is enormous.
realized this. They gave guarantees and provided people
And central banks like the Fed and the ECB can buy much of
with necessary cash. The only thing that could be said, is
the debt.
they could have done more. But there are new The growing debt is affordable because of the low interest
Doing nothing could lead to a prolonged and unnecessary economic downturn. 8
FINANCIAL INVESTIGATOR
NUMMER 8 / 2020
rates. For the moment there is not much upward pressure on bond yields. The real pressure would come from higher consumer price inflation, which is mainly driven by wages, and there’s little upward on wages because of the high rate
