Why the hoped-for solution to runaway government debt won’t work this time around



“Rapid growth is no longer possible” and “inflation will not be tolerated” in companies with low wage growth: head of Singapore’s central bank. It was said out loud.

Through Wolf Richter for LOUP STREET.

The solution now to the huge debt build-up in developed economies: to raise consumer price inflation and let it soar, according to the most recent dogma endlessly trotted by the Fed and other central banks , and hope that rapid economic growth will take care of the rest.

The US federal government debt alone has swelled by $ 3.5 trillion in just eight months, and $ 4.2 trillion in 12 months, to a breathtaking $ 26.7 trillion today:

Rising inflation and strong economic growth helped in the decades following World War II to reduce debt levels in heavily indebted countries, such as the United States, but it will not work this way. times, said Tharman Shanmugaratnam, Singapore’s senior cabinet minister. , Chairman of the Monetary Authority of Singapore (Singapore’s central bank) and Vice-Chairman of the Government of Singapore Investment Corporation (Singapore’s sovereign wealth fund). It was Speaking on the opening day of the Singapore Virtual Summit.

“I think the big problem for the next decade is how to ensure that debts are sustainable,” he said. “First, it is obvious that you cannot just keep increasing your debt. I do not believe that the new high levels of debt that many countries are now moving towards will be sustainable without imposing a significant cost on growth as well as on equity within their societies.

The question of “fairness” is how these costs are distributed in society. In other words, who will be affected by these costs and who will benefit.

“It’s not like the post-war period,” he says. “In fact, after World War II, many advanced countries started having very high debt levels – the United States, the United Kingdom, many European countries – but they drastically reduced it in 30 years. years. How did they do it? Rapid growth and inflation. And both are no longer possible.

“Rapid growth is no longer possible; these are now aging societies; productivity growth is much lower than before, ”he said.

“And inflation will not be tolerated by older societies,” he said. “They can be tolerated when societies are young and everyone’s incomes are increasing, but it will not be tolerated now. So this option is not there. Like drugs that are not tolerated and that make the patient sicker even more.

“We also cannot assume that today’s low interest rates will stay low forever.” Interest rates will rise to more normal levels at some point, which will increase the costs of that debt, she said. Governments need to find a way to grow their economies without simply increasing the deficit.

“It is a very serious problem,” he said. “You’re going to need tax reforms – not just cutting spending. But you need quality spending and the means to generate income that doesn’t hurt growth, ”he said.

So this is it. What everyone already knew has now been said out loud at an official event. The new dogma will not work. There are solutions, as Tharman Shanmugaratnam pointed out, but they are more complex to implement and do not involve such a convenient printing press.

But borrowing and printing money forever, and hoping that consumer price inflation will reduce the debt burden, will not help create a healthy economy and prosperity.

What consumer price inflation does in today’s developed economies is destroy the purchasing power of money, and therefore the purchasing power of an already existing workforce. in difficulty paid in that currency, and consequently shakes up consumption and creates more frustration and social inequities, which would then be dealt with with even more borrowing, impressions and inflation?

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