Dealing with the debt burden

The first part of a new series by the Ninety One Investment Institute

Self-filmed at home by our authors, during the Great Shutdown.

The fast view:

• The unprecedented policy action from governments globally to cushion the virus impact has led to significant extra debt being added to already high levels.
• The use of government debt in times of stress is not new, having been used extensively during times of war.
• If history repeats itself and households and corporations reduce consumption and increase savings, as they did in 2008, then governments will be forced to take up the slack – adding more to the debt burden.
• This debt will need to be repaid eventually. Money invested in government debt is diverting resources from other more productive activities. It will burden generations to come unless something is done.
• Most options to reduce this burden are unlikely, unpopular or unrealistic. But we believe financial repression – the capping of bond yields via central bank yield curve control, regulations that require the financial sector to hold more government bonds and keeping real yields negative – is the most likely outcome.
• Understanding why this is the case is a crucial part of our Investment Institute research, which we explore in this paper.

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