The surge in supply of government bonds is likely to push yields higher, though central-bank buying can help keep a lid on them. That’s already an explicit goal of the Bank of Japan, and other countries are set to follow.
In the U.S., investors may rethink the risks lurking in the longest-duration bonds -- but that’s likely a problem for down the road, with much of the initial burst of borrowing set to be financed by short-term paper.
Turn It Off?
Governments may also face political pressure to unwind their largesse, and at least some economists are likely to join in.
In the crisis moment, there’s been a shift among even conservative economists and they’ve united behind “rapid and large fiscal stimulus,” said Adam Posen, who heads the Peterson Institute for International Economics in Washington.
“Whether that is an ongoing turning point remains to be seen,” he said. “If we see a recovery, God willing in months, people will want to turn off the taps.”
Germany, for one, signaled this week that it aims to return to its customary frugal stance -- though officials acknowledged further stimulus may be needed first, if the economy is stuck in a deep slump after the public health emergency has abated.
A pickup in inflation –- a risk given the epidemic has shut down so much production -- could also make conditions tougher for the borrowers.
‘Austerity Drive’
But there’s an alternative post-virus future in which politicians are reluctant to balance the books -- and some economists question whether it makes sense to even try.
James Knightley, chief international economist at ING, cites the U.S. case as an example. “I really cannot see Donald Trump, assuming he gets re-elected, embarking on an austerity drive to get the fiscal position on a sounder footing,” he says.
For progressive Democrats too, the fiscal debate “should have changed forever,” according to Nobel prize-winning economist Joseph Stiglitz. After Trump’s trillion-dollar deficits, it’ll be hard to make the case that “somehow we can’t afford healthcare and education,” he says. “That argument is going to look very different.”
It’s in this scenario that the once-strict dividing lines between fiscal and monetary policy, already looking a bit blurry of late, are likely to get even more so.
“There could be pressure to come up with a plan to see central banks cancel a proportion of government debts around the world,” said Knightley. “There will be more calls for these sorts of extreme measures.”
While deficits and debt have surged to much higher levels during major wars, Deutsche Bank strategists found that public-debt-to-GDP ratios “as a median across the major developed economies” are currently at peace-time records.