Global debt is expected to reach a record $277 trillion by the end of 2020, according to the Institute of International Finance.
Developed markets’ total debt—government, corporate, and household—increased to 432 percent of GDP in the third quarter. The debt-to-GDP ratio for emerging markets also increased to almost 250 percent over the same time period, with China’s ratio reaching 335 percent and expected to reach around 365 percent of global GDP for the whole year.
Most of this massive increase of $15 trillion in one year comes from government and corporate responses to the pandemic. However, we must remember that the total debt figure had already reached record highs in 2019 before any pandemic and in a period of growth.
The main problem is that most of this debt is unproductive debt. Governments are using the unprecedented fiscal space to perpetuate bloated current spending, which generates no real economic return, so the likely outcome will be that debt will continue to rise after the pandemic crisis has ended, and that the level of growth and productivity achieved won’t be enough to reduce the financial burden on public accounts.
The Great Reset
In this context, the World Economic Forum has presented a roadmap for what has been called “The Great Reset.” It’s a plan that aims to take the current opportunity to “shape the recovery” and “help inform all those determining the future state of global relations, the direction of national economies, the priorities of societies, the nature of business models, and the management of a global commons.”
According to the World Economic Forum, the world must also adapt to the current reality by “steer[ing] the market toward fairer outcomes …, ensure that investments advance shared goals, such as equality and sustainability …, [and] harness the innovations of the Fourth Industrial Revolution to support the public good.”
These objectives are obviously shared by all of us, and the reality shows that the private sector is already implementing these ideas, as we see technology, renewable investments, and sustainability plans thriving all over the world.
We are witnessing in real time the proof that businesses adapt rapidly and provide better goods and services at affordable prices for everyone, achieving a level of progress in environmental targets and welfare that would be unthinkable if governments were in charge.
This crisis shows that the world has escaped the risk of scarcity and hyperinflation, thanks to a private sector that has surpassed all expectations in a seemingly insurmountable crisis.
Danger of Interventionism
The overall message of the World Economic Forum sounds promising. There are only three words that spoil the entire positive message: “steering the market.” The risk of governments taking these ideas to promote massive interventionism isn’t small. The idea of The Great Reset has been quickly embraced by the most bureaucratic and government-intervened economies as validation of rising government intervention in the economy. However, this is incorrect.
The idea that governments will promote an economic system that reduces inflation, improves competition, and empowers citizens is more than far-fetched. As such, the World Economic Forum can’t ignore the government intervention risk within this idea of a Great Reset, which doesn’t need to be enforced as it has already been in place for years.
Technology, competition, and open markets will do more for sustainability, social welfare, and the environment than government action, because even the best-intentioned governments will try to defend at any cost three things that go against the well-intentioned messages of the World Economic Forum: their national champions, rising inflation, and more control of the economy. Those three things work against the idea of a new world with better and more affordable goods and services for all, with better welfare, lower unemployment, and a thriving high-productivity private sector.
We should always be worried about well-intentioned ideas when the first ones to embrace them are those who are against freedom and competition.
Wiping Out the Debt
There’s an even darker part. Many interventionists have welcomed this proposal as an opportunity to wipe out the debt. It all sounds nice until we understand what it really entails.
There’s an enormous risk that governments will use the excuse of canceling part of their debt alongside a decision to cancel a large part of our savings. We must remember that this isn’t even a conspiracy theory. Most proponents of Modern Monetary Theory start their premise by stating that government deficits are matched by household and private sector savings, so there’s no problem. Well, the only minor problem (note the irony) is matching one’s debt with another’s savings.
If we understand the global monetary system, we’ll then understand that erasing trillions of government debt would also mean erasing trillions of citizens’ savings.
The idea of a more sustainable, cleaner, and social economic system isn’t new, and it doesn’t need governments to impose it. It’s happening as we speak, because of competition and technology. Governments shouldn’t be allowed to reduce and limit citizens’ freedom, savings, and real wages, even for a well-intentioned promise.
The best way to ensure that governments or large corporations don’t use this excuse to eliminate freedom and individual rights is by promoting free markets and more competition. Forward-thinking investments and welfare-enhancing ideas don’t need to be nudged or imposed: consumers are already making companies all over the world implement increasingly higher sustainability and environmentally friendly policies.
This market-oriented approach is more successful than letting the risk of interventionism and government-meddling take hold, because once it happens, it’s almost impossible to undo.
If we want a more sustainable world, we need to defend sound monetary policies and less government intervention. Free markets, not governments, will make this world better for all.
Daniel Lacalle, Ph.D., is chief economist at hedge fund Tressis and author of “Freedom or Equality,” “Escape from the Central Bank Trap,” and “Life in the Financial Markets.”
Views expressed in this article are the opinions of the author and do not necessarily reflect the views of The Epoch Times.