Everyone is talking about debt. This is mainly because of the enormous amounts governments are borrowing to cover extra spending in responding to the pandemic. The Office for Budget Responsibility estimates that Tory chancellor Rishi Sunak will spend £344 billion on the pandemic in 2020-21, 16 percent of national income.
Government borrowing in the same period is projected at £355 billion. As a result, British public debt is forecast to reach 97 percent of gross domestic product by the mid‑2020s, way above a pre-pandemic figure of 73 percent.
In Britain and the United States most of the new debt takes the form of government bonds bought by the central banks. In effect they are creating the money the government is spending.
But according to a central pillar of free market orthodoxy, creating new money will increase the rate of inflation. Ultra‑neoliberals have been predicting an inflationary surge ever since central banks began the policy of “quantitative easing” in response to the 2007-8 crash. The policy saw bonds held by banks bought as a way of putting extra money into the financial system. But the surge never happened.
The same predictions are now being made by more mainstream figures. Both ex-US treasury secretary Lawrence Summers and Martin Wolf of the Financial Times have warned that Joe Biden’s $1.9 trillion (£1.37 trillion) fiscal stimulus may be inflationary.
More importantly, the huge global markets in government bonds have started behaving as if they agree with them. Prices have fallen very sharply for leading government bonds this year. Bonds entitle their holders to a fixed income. So, if the price falls the “yield”, or rate of return on the bond, rises. The yield on the US Treasury ten-year bond has jumped from under 1 percent to 1.6 percent.
Bond yields exert an enormous influence on interest rates, so the rise puts pressure on central banks to raise their interest rates to curb inflation.
The economist Ed Yardeni says, “We’re in a brave new world of excesses in fiscal and monetary policy, and that’s where the bond vigilantes thrive. It’s their job to bring law and order back to the economy when the central banks and the fiscal authorities are lawless.”
But there’s not much evidence that inflation is taking off. The prices of some commodities—notably oil and copper—have risen. This reflects speculation that the rollout of vaccines will lead to a rapid end to the pandemic and a huge economic boom to make up for the output lost in the past year.
This is probably wishful thinking. Rapid vaccine distribution is confined to a handful of countries. Even in the imperialist core of the world economy, the European Union is bungling the rollout and vaccination is very uneven in the US. And the picture is much grimmer in the global South. It will take comprehensive worldwide vaccinations to overcome Covid‑19.
Meanwhile states seem less afraid of the bond markets than they were in the 1990s. Central banks have got used to managing them. Robert Michele of JPMorgan points out that the US Federal Reserve Board is buying $120 billion (£86 billion) of bonds a month.
“At some point yields will have gotten too high, and the relentless weight of the bond purchases from the central banks will stabilise the market. The asset purchases are relentless. You can’t fight that,” he says.
How serious the accumulating debt is in the longer term really depends on the state of the productive economy that has to carry it.
Here the picture is gloomy because the major economies were still struggling with the effects of the global financial crisis before the pandemic hit.
But Sunak gave the wrong answer when he played to the Thatcherite instincts of Tory backbenchers by increasing taxation. Not just on corporations, but on ordinary wage earners by freezing their tax allowances.
The insulting 1 percent pay increase to NHS workers was a signal that when the economic recovery does come, Sunak will greet it with yet more austerity. Debt is one thing, who pays for it is quite another.