Covid 19 and the Debt Tool

| September 14, 2020 | 0 Comments

Dickson Igwe, Senior political contributor

In a world that was already awash with debt, before the Covid 19 Pandemic, it appears debt remains the one tool for keeping the global economy alive, until the pandemic ends.

The good news is that the Covid 19 Pandemic may well be over by December 2021.

A vaccine is expected to be approved and widely distributed in 2021. There is also the development of swift testing using a basic saliva test that offers immediate results. Both of these- vaccine and swift test- will see the world return to an economic normal by early 2022.

Then the vaccine must be safe. Globally, pharmaceutical companies are in a rush to develop and market any approved vaccine in 2021.

Internationally, lockdowns to prevent the spread of Covid has placed much of the global economy on life support. The Caribbean and the Virgin Islands are not alone in their economic struggle. And catastrophic job losses from the shutting down of businesses are a worldwide phenomenon.

Consequently the one route back to normalcy is government investment and public borrowing, to keep economies on life support.

Countries with multi trillion dollar GDPs are able to borrow cash cheaply, especially in a post 2008 deflationary environment.

The USA for example has borrowed over 3 trillion dollars from investors through QE. This has kept the US economy from total collapse.

The same is true for much of Europe, where huge government borrowing is keeping people and businesses from poverty and bankruptcy.

Photo courtesy Financial Times

The current economic solution to forestall widespread economic collapse is government’s insuring their countries against the huge costs of the pandemic through public spending and stimulus packages.

Thankfully the world is faced with super low interest rates and deflation.

The preceding means governments can borrow cheaply and sustainably, even without limit. The reason is that interest rates over past decades have been on a declining trend. Then post the 2008 recession the deflationary environment has persisted.

Consequently, everywhere, borrowing costs are low. Governments around the world can sustain much greater debt levels in a world of cheap debt.

Then inflation is not a worry. In past years flooding the markets with cash led to inflation which was a turn off for savers and led to boom and bust cycles.

However, when there is low inflation, investors are happy buying government debt, even though that debt earns a low rate of interest.

The fact is that in the age of Covid, the one route to a sustainable economy, short, medium, and long term, and in the midst of economic disaster, is government borrowing and huge public spending.

Thankfully, in an environment of low inflation, borrowing trillions of dollars from investors to inject into the world economy remains sustainable, even desirable.

The one caveat is that this debt will have to be repaid in the coming years.  And a global debt overhang lasting well into the 2030s will have consequences yet unknown for even the most brilliant economists.

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Category: African Caribbean

About the Author (Author Profile)

Dickson Igwe is an education official in the Virgin Islands. He is also a national sea safety instructor. He writes a national column across media and has authored a story book on the Caribbean: ‘The Adventures of a West Indian Villager’. Dickson is focused on economics articles, and he believes economics holds the answer to the full economic and social development of the Caribbean. He is of both West African and Caribbean heritage. Dickson is married with one son.

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