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Rising debt aims to steady economies in the wake of coronavirus

In this podcast, Brian Blackstone chats to Credit Suisse economist Oliver Adler about the vast increase in public debt to finance the global pandemic response.

Public debt will provide support in the short term

Amid all the economic uncertainties surrounding the COVID-19 crisis, one thing is very clear: there will be trillions of dollars in new public debt worldwide to fund large spending programs aimed at supporting households and businesses.

"In the short-term, fiscal action means relief for households. You get checks, support for employment and guaranteed credits for businesses. The question is more the long run, will there be a problem servicing the debt?" Adler said.

The implications of high public debt for future generations

For now, ultra-low interest rates and restrained inflation suggest that financing these deficits should not be a problem. However, once economies recover and people re-enter the workforce, there is a danger that high public debt could crowd out financing for private investment opportunities.

Beyond the financial implications, there are broader societal considerations of adding debt that future generations will have to repay.

"It's a breakdown of the intergenerational contract," Adler said. Even if low interest rates make it easier for high levels of debt to be serviced, "it points to some dysfunction in the way government works."

Changing attitudes to debt levels

Before the current crisis, debt levels were already high in many countries such as the US, Japan and parts of Europe, a contrast to the 1990s when it was widely accepted that low deficits—and even surpluses—were central to long-term growth and prosperity.

"It's different from country to country. I wouldn't say generally that it's an attitude that debt doesn't matter. It's a series of shocks that have surprised governments," Adler said. In Switzerland, for instance, public debt is quite low relative to the size of its economy.

In Europe, "I don't think we're on this route to just indefinite debt creation," in part because of Germany's influence on the region's economic and fiscal policies, Adler said.

"Even in the US, there it's harder to tell but I would say that eventually we will hopefully come back to a normalization."