Pandemic, Massive Debt, and Gold

by | Jun 24, 2020 | 0 comments

We emphasized the link between the current coronavirus pandemic and the way this is likely to translate into ballooning public debt in many countries. We also emphasized that gold is likely to benefit from this situation. In this analysis, we will supplement the above by showing you how much the debt is likely to increase in selected countries.

Let’s start with Italy, whose economic fundamentals have been already poor: we mean here fragile banking system, growth stagnation and high public debt (see the chart below). Now, as the most affected European country by the virus, with the highest number of cases and fatalities, and the lockdown of its economy, Italy will enter a grave recession (the economy is expected to shrink by 5 percent at least), while its public debt will surge from 135 to above 140 percent of the GDP, or even more – as a reminder, Italy’s public debt went up more than a few percentage points in the single year of 2009 (from 106.5 to 116.9 percent of GDP).

Other southern countries will also face the reemergence of the sovereign debt crisis. This time Greece’s debt-to-GDP starts at over 180 percent, compared with 146 percent in 2010; Spain at 95 percent vs. 60 percent; Portugal at 122 percent vs. 96 percent; and France 98 percent vs. 85 percent. And private debts have also increased over the last years!

The US is less indebted and not so badly hit by the COVID-19 (at least so far), but its economy is also forecasted to shrink in 2020. The combination of lower GDP and tax revenues with higher public expenditures will balloon the deficit and federal debt from slightly above $23 trillion, or 107 percent of GDP, in 2019 to almost $26 trillion, or more than 120 percent of GDP, in 2020.

Now, it means that we have a serious debt problem. How all these countries could repay all their debts? Well, they could increase taxes. It might happen in the US if a Democrat takes over the White House. However, taxes are already high and unpopular. So, the governments could also accelerate economic growth – but it is rather unlikely given the pre-pandemic trends and the accelerating response. And if they hike taxes, the growth will not speed up for sure. So, the only remaining – and more probable from the historical point of view – option, is it to inflate the debt. Financial repression with corralling mandatory investments into “safe” assets that are guaranteed not to keep up with the real or massaged inflation data.

With higher inflation, the real value of government debts will be lower. And the central banks have already eagerly started to buy government bonds with newly created reserves. It means that one of the important implications of the current pandemic and following policy response will be higher inflation. Perhaps not immediately, as the negative demand shock will create some deflationary pressure (although the negative supply shock creates inflationary pressure), but we should not neglect the threat of inflation. It means only one thing: when the dust settles and investors realize what is happening, they will turn to the ultimate inflation hedge – gold.


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