Pandemic Costs Have Driven Debt to WWII Levels

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Government spending to mitigate the effects of the coronavirus pandemic has pushed debt to WWII levels.

Government spending to mitigate the effects of the coronavirus pandemic has pushed debt to WWII levels, according to the Wall Street Journal.

Debt has risen to 128 percent of the global gross domestic product as of July, according to the International Monetary Fund. In 1946, one year after the end of WWII, it was at 124 percent. Glenn Hubbard, chairman of the Council of Economic Advisers under President George W. Bush believes governments shouldn't be concerned about debt levels until the pandemic is under control.

“The war analogy is exactly the right one,” said Mr. Hubbard. “We were and are fighting a war. It’s a virus, not a foreign power, but the level of spending isn’t the problem.” Following WWII, major economic powers were able to drastically decrease debt as economic growth surged. By 1959, GDP to debt had fallen to less than 50 percent. However, this time around it will probably be harder to decrease debt due to demographics, technology, and slower growth.

In the late 1950s economies were surging.

  • France and Candian economies were growing around 5 percent a year.
  • Italy's economy was growing almost 6 percent a year.
  • Germany and Japan were growing 8 percent a year.
  • The US was growing at almost 4 percent a year.

“We’d be lucky to have half that over the next decade,” said Nathan Sheets, a former undersecretary of the Treasury for international affairs and now chief economist at PGIM Fixed Income, the investment-management business of Prudential Financial Inc.

Recently, economies have been far below growth rates seen in 1959.

  • The US, UK, and Germany have grown around 2 percent a year.
  • Japan and France have grown around 1 percent.
  • Italy's economy has barely grown at all.

Decreasing population growth will also play a key role in the slow recovery of economies. In the early 1960s, the seven most advanced economies had a population growth of at least 1 percent a year. Today, none of these 7 advanced economic powers has a population growth of 1 percent, and Italy and Japan are shrinking.

Once pandemic programs, such as unemployment benefit boosts and direct payments, are lifted, it should help reduce spending but not by as much as after WWII. “Can we avoid letting the exploding spending during the war, not turn into massive expanded social spending going forward?” asked Mr. Hubbard. Debt was already high prior to the coronavirus crisis, the pandemic only exacerbated the issue.

Furthermore, after the war, many nations reduce wage and price controls leading to a surge in inflation. This also contributed to lowering debt. However, there is no inflation present despite trillions spent on stimulus.

Having high levels of debt may become the new norm for advanced economies. More than $4 trillion of the $26 trillion in US debt is held by the Fed. “My expectation is central banks will be successful, but it does pose challenges,” said Mr. Sheets. “Whenever you’re in such unfamiliar terrain, there’s always the risk of something possibly going wrong. It is a generational question that we’ll struggle with for some time to come.”

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