Bloated US government debt is here to stay, say experts

JACKSON HOLE (WYOMING): Swollen government indebtedness – and the upward pressure that puts on interest rates – is here to stay, according to a paper to be presented to the Federal Reserve’s annual Jackson Hole symposium last Saturday.

“High public debts are not going to decline significantly for the foreseeable future,” International Monetary Fund economist Serkan Arslanalp and University of California, Berkeley professor Barry Eichengreen wrote in the paper.

“Countries are going to have to live with this new reality as a semi-permanent state.”

The United States and other highly rated advanced-country creditors should find doing so “manageable,” thanks to demand for their debt as a “safe asset” from public institutions like central banks and private investors, the economists said.

But emerging markets and especially developing countries will face more difficulties, with debt restructuring likely necessary in many cases, they added.

The paper examines a variety of ways indebtedness could be reduced and finds them unlikely to occur.

Divided governments will find it difficult to cut spending and boost taxes, especially at a time of slow economic growth.

Inflating away the debt won’t work, unless the increase in inflation is a surprise and is substantial. And interest rates, if anything, are more likely to trend higher, than lower.

“It is hard to foresee them falling still lower, and there are good reasons for thinking that they may now start heading up,” including the high level of public debt, Arslanalp and Eichengreen wrote.They expect private demand for safe assets from financial institutions and retail investors to grow by roughly US$2 trillion by 2026. That will be on top of an increase of as much as US$1.9 trillion from emerging-market central banks.

But the supply of assets from the United States, Germany and other highly rated countries, as well as lesser-graded creditors like Japan and the UK, is likely to be bigger, putting upward pressure on rates, they said.

The economists warned that countries like the United States can’t take their status as top-tier creditors for granted and “must take care to avoid actions that cause their safe assets to be rerated as unsafe.”

In that regard, Fitch Ratings Inc stripped the United States of its top AAA credit rating earlier this month, citing the country’s high and growing indebtedness and repeated standoffs in Washington over the debt ceiling. That left only one of three leading ratings agencies, Moody’s Investors Service Inc, grading US debt AAA. — Bloomberg