gros167_John KeebleGetty Images_bankofengland John Keeble/Getty Images

The Stabilizing Effect of Inflation

With inflation spiking and governments' debt ratios soaring, one might conclude that a financial crisis is imminent. But, with many governments' debts being inflated away and real interest rates still negative, that scenario remains unlikely today.

BRUSSELS – Central banks are busy tightening monetary policy as quickly as they can. Even the usually careful European Central Bank just increased its key interest rate by an unprecedented 75 basis points, matching an earlier move by the US Federal Reserve. Financial markets have reacted to these actions as one would expect, with stock markets and long-term-bond prices both tumbling. But none of this means that a financial crisis is imminent.

One might conclude the opposite, given the cocktail of war in Ukraine, exploding energy prices, and soaring inflation, especially because debt levels are much higher today than they were on the eve of the last financial crisis. In the United States, the total debt of non-financial corporations has doubled over the last decade, reaching $12 trillion, and gross national debt has just surpassed $31 trillion for the first time.

The US is hardly alone. Because of the COVID-19 recession, public debt has increased almost everywhere, with the advanced-economy average having grown by 20 percentage points, to over 120% of GDP.

To continue reading, register now.

Subscribe now for unlimited access to everything PS has to offer.


As a registered user, you can enjoy more PS content every month – for free.