In the Financial Times, John Plender explains that the debt being taken on to fight coronavirus will never be repaid, just inflated away. He writes:
A more fundamental question about the recovery relates to the central banks’ asset-purchasing programmes. William White, former head of the monetary and economic department at the Bank for International Settlements, points out that repeated monetary easing to stimulate demand brings forward private spending in time, with purchases being financed by debt accumulation. As the weight of the debt burden increases, the effectiveness of monetary easing declines. In short, the continuation of ultra-low interest rates procures less and less growth.
On a longer run perspective, the problem is one of asymmetric monetary policy. Since 1987 the Fed has put a safety net under markets when confronting systemic threats, while choosing not to restrain prices when they are in bubble territory. This morally hazardous approach to monetary policymaking means central banks repeatedly set the stage for the next boom and bust cycle, fuelled by ever declining credit standards and ever expanding debt accumulation.
The Institute of International Finance, a trade body, estimates that global debt, both public and private, topped $255tn at the end of 2019. That is $87tn higher than at the onset of the 2008 crisis and it is undoubtedly going to be very much higher as a result of the pandemic.
The question, then, is how to break out of the asymmetric policy bind. In due course, potential measures could range from equalising the tax treatment of debt and equity; changing boardroom incentive structures that encourage debt-financed stock buybacks that weaken corporate balance sheets; and tougher competition policy to curb debt-financed takeovers that create near-monopolistic corporate giants.
The current debt overhang will never be repaid in full. With central banks directly monetising government deficits, much of the debt will ultimately be inflated away — which is something that fixed-income markets resolutely refuse to believe. Since the turn of the millennium, markets have been plagued by widespread mispricings of risk. Here, almost certainly, is another case in point.
Read more here.