Ballooning debt not seen as crisis

Pandemic fuels flood of borrowing, but experts no longer worried.

Economists and deficit hawks have warned for decades that the United States was borrowing too much money. The federal debt was ballooning so fast, they said, that economic ruin was inevitable: Interest rates would skyrocket, taxes would rise and inflation would probably run wild.

The death spiral could be triggered once the debt surpassed the size of the U.S. economy — a turning point that was probably still years in the future.

It actually happened much sooner: sometime before the end of June.

The coronavirus pandemic, and the economic collapse that followed, unleashed a historic run of government borrowing.

But the economy has not drowned in the flood of red ink — and there is a growing sense that the country could take on even more without any serious consequences.

“Nobody is very worried about debt,” said Olivier Blanchard, a senior fellow at the Peterson Institute for International Economics and a former chief economist for the International Monetary Fund. “It’s clear that we can probably go where we are going, which is debt ratios above 100% in many countries. And that’s not the end of the world.”

That nonchalant attitude toward what were once thought to be major breaking points reflects an evolution in the way investors, economists and central bankers think about government debt.

As levels of debt among rich nations like the United States and Japan have climbed relentlessly in recent decades, the cost of carrying that debt — reflected in interest rates — has tumbled, leaving little indication that markets were losing confidence in the willingness and ability of these countries to carry their financial burdens.

And since the 2008 financial crisis, traditional thinking about borrowing by governments — at least those that control their own currencies — has further weakened, as central banks in major developed markets became enormous buyers in government bond markets.

Critics repeatedly said this circular form of fiscal finance — in which one arm of the government, the central bank, basically creates the money needed to fund the arm of government that taxes and spends — would inevitably lead to a spiral of inflation or a spike in interest rates. It didn’t.

“The whole premise that deficits drive up interest rates, it’s just wrong,” said Stephanie Kelton, a professor of economics and public policy at Stony Brook University.