Since the Pandemic started, global Government spending has continued to soar. How will they fund this huge debt?
Contrary to popular belief, there’s little reason to think that the recent spending through government programs will make it too difficult to repay their debts down the road.
Four ways governments can reduce their debt
1. Just imagine you have to increase your mortgage from, let’s say, $500 000 to $800 000 following economic difficulty. The level of debt is not detrimental as long as the value of your home continues increasing by more than the cost of interest. And in the same way, if the economy grows faster than the interest rate on the debt, the governments will be able to outgrow the additional burden.
2. Future taxation. When the economy is depressed, people spend less, and government transfers money to individuals and companies. Therefore, private savings rise more than enough to compensate for the decline in government savings. The end result is a higher level of national wealth that governments will be able to tax in the future when the economy recovers.
3. Default. Defaulting on the debt is an option that some countries have used as a last resort in the past. But it’s not a realistic option for most developed economies.
4. Inflate away the debt. Governments will lean on central banks to keep rates low and let inflation accelerate, which will indirectly deflate the debt.
The Key Takeaway
Despite the massive amounts spent to help the economy recover during difficult times, governments, especially in North America, do have several options to pay down the debt.
Thank you for watching, and see you next time.