In the United States, rising debt was a problem well before the coronavirus pandemic. Former President Trump’s 2017 tax cuts, combined with more than $3 trillion in COVID-19 related stimulus, helped push the national debt to $27.75 trillion by the end of 2020, or 130% of GDP, according to the Congressional Budget Office.
“Every class of debt government, household, corporate, auto loans, student loans was at a trillion dollar each before COVID hit,” economist Dambisa Moyo said at a Yahoo Finance Davos agenda panel at the World Economic Forum on Friday.
Mounting debt “has material consequences for growth” and rising debt makes it difficult for the economy to grow much pass an annualized rate of 2%. But Moyo acknowledged that “we're in an emergency. So we have to solve the here and now.”
Moyo said the U.S. needs to have conversations with China, the largest foreign lender to the U.S., and ensure that the U.S. will repay once growth is on track.
A multilateral approach is needed to combat the debt problem, Dr. Rajiv Shah, president of the Rockefeller Foundation, said at the Davos panel.
“Frankly, we need some type of global coordinated economic plan that helps to lift up much of the emerging world that has not had the capacity to make the kinds of investments other nations have made,” he said.
John Rogers, chairman and CEO of Ariel Capital Management, also noted that debt burden is a generational one and despite the debt burden, the stock market has gone higher and the U.S.economy has grown.
“I do think what's going to happen now, because of this extra stimulus coming through on top of all the other spending, we're going to end up with higher inflation than people expect,” Rogers said. “I think it'll be significantly higher than what the Fed has been talking about. And therefore, it's going to push interest rates significantly higher than anticipated.”
Rogers warns that could spell trouble for parts of the economy (namely the housing market) that have thrived, in large part, because of ultra-low interest rates. “I think that's going to be the cost to our society, as these higher rates are going to make homes less affordable,” he said.
Rogers also cautioned that investors may need to re-value growth stocks — which have benefited from low interest rates. “I'd be very careful about the FANG stocks. I'd be very careful about the S&P 500 (^GSPC) that's dominated by those high growth companies in this new [higher interest rate] environment,” he said.
Core inflation, which excludes food and energy costs, is currently running around 1.4%. But a growing number of economists now expect inflation to rise above the Federal Reserve’s 2% target sometime in the next 18 to 24 months.
We’ve already seen higher inflation during the pandemic. Food prices have increased by nearly 4% in the last year, higher than at any point since the 1970s, according to the U.S. Labor Department’s Bureau of Labor Statistics.
Economists warn that rising inflation coupled with wage stagnation will chip away at consumers’ purchasing power. “Managing the long-term debt is going to be important,” said Shah.
Alexis Christoforous is an anchor and reporter for Yahoo Finance. Follow her on Twitter @AlexisTVNews.
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January 30, 2021 at 05:27AM
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DAVOS 2021: What should be done about unsurmountable global debt load - Yahoo Finance
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