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Time for a Selective Debt Jubilee

With a global depression looming, no country will be able to avoid the need for massive stimulus spending and the explosion of debt that will come with it. While advanced economies have creative options for managing these claims, it is already obvious that developing countries will need a more radical solution.

NEW YORK – The COVID-19 crisis will leave many private and public borrowers saddled with unsustainable debt. We are still in the “pre-Keynesian” supply-shock-cum-derived-demand-shock phase of what is likely to be a global depression. But once the virus is mostly vanquished, households will engage in precautionary saving, and businesses will be reluctant to commit to capital expenditures, driving a further decline in aggregate demand – the Keynesian phase. Deficit-financed fiscal stimulus, monetized where possible, will probably be the only tool capable of closing the output gap.

As the issuer of the world’s dominant reserve currency, the United States faces fewer constraints than other countries on the federal government’s ability to borrow and to monetize public debt. Its economic-policy response so far – the Coronavirus Aid, Relief, and Economic Security (CARES) Act – earmarks $2.3 trillion for income support, grants, loans, asset purchases, and other guarantees. According to the Congressional Budget Office, the legislation will increase the federal deficit by “only” around $1.7 trillion over the next decade. The difference reflects the $454 billion set aside to fund guarantees for emergency lending facilities established by the US Federal Reserve, on the assumption that these guarantees will never actually be called upon.

If only it were so. Another $3 trillion fiscal bill, recently passed by the Democratic-controlled US House of Representatives, will likely be adopted in some form by the Senate, and still more stimulus may follow after that. Lawmakers are realizing that, even in the US, many state and local governments will not have the means to weather the crisis without the benefit of debt and loan guarantees or direct transfers from the federal government.

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