Already a subscriber?If something cannot go on forever, it will stop.” This is known as Stein’s Law, after the late Herbert Stein, former chairman of Richard Nixon’s Council of Economic Advisers. Stein published this in June 1989, in reference to US trade and budget deficits.
The global financial crisis that hit in 2007 and then the pandemic of 2020 and its aftermath caused huge jumps in ratios of public debt to GDP in high-income and emerging economies. By 2028, these are forecast to reach 120 and 80 per cent respectively. In the former case, these are the highest ratios since the Second World War. In the latter case, these are the highest ever.
Ageing directly raises public spending pressures, too. Moreover, even if, as seems likely, equilibrium short-term real interest rates – the so-called “natural rate” – fall back to low levels again, long-term real interest rates may not do so, partly because of recent jumps in the perception of risk. This “term-risk premium” has risen substantially recently.
“From 2024 to 2034, increases in mandatory spending and interest costs outpace declines in discretionary spending and growth in revenues and the economy, driving up debt. That trend persists, pushing federal debt to 172 per cent of GDP in 2054,” the report says. Crucially, politics are strongly against it. Since Ronald Reagan, the Republicans have become indifferent to balancing the budget. Their aim, instead, is lower taxes.
Source: Loan Digest (loandigest.net)
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