E Where Are The Bond Vigilantes?

“No one really knows at what level a government’s debt begins to hurt an economy; there’s a heated debate among economists on that question. If interest rates remain low, as currently anticipated, the government can handle a much heavier debt load than was once thought possible. And the recent increase in borrowing—while enormous—is a temporary increase intended to combat an emergency; it changes the level of the debt, but not its long-run trajectory.” (David Wessel, How worried should you be about the federal deficit and debt? July 8, 2020)

How worried should we be about high government debts? Where are the bond vigilantes which usually upset markets?

Is government debt at a global level a real problem, or does it depend upon the specific country that is indebted? Does the surge in government borrowing at close to zero interest rates really matter?

At this time, the large-scale government debts of the advanced economies and which are supported by central banks to fight the pandemic recession are not seen to be a major problem.

Indeed, the US, European and Canadian governments are borrowing vast amounts of money at extremely low-interest rates, and one cannot make the argument that private sector borrowing is being crowded out either by having to pay higher interest rates or because they have no room to borrow.

Here is an example of how quickly US government debt has increased. Measured against the size of the US economy, the US government debt was around 35% of GDP before the Great Recession of 2007–09 and increased to nearly 80% of GDP just before the pandemic began.

The US federal debt percentage is heading to around 100% of GDP this year. It likely will continue to rise next year and shortly exceed the record set in 1946 of 106.1% of GDP.

With respect to central bank financing of US government debt, in 2010 the Federal Reserve held about 10% of all Treasury debt outstanding; today it holds more than 20%.

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Norman Mogil 4 weeks ago Contributor's comment

Arthur you're mixing a stock with a flow when you start comparing outstanding debt to GDP. There's no criteria to judge the burden of debt in that way

With 17 trillion dollars of debt trading at negative interest rates the bond market is giving an opposite signal. Namely that deflation is the order of the day. The Bond vigilantes have spoken.

Alpha Stockman 4 weeks ago Member's comment

Good point.