July 20, 2020
Ruchir Sharma had a New York Times column today telling readers that Germany will likely emerge from the pandemic as the world’s leading economic power. Part of his story is based on Germany’s robust pandemic stimulus package, which he puts at 47 percent of GDP. (This is somewhat misleading since it includes the nominal value of government loan guarantees, but it is robust stimulus by any measure.) Germany has also successfully used work-sharing and other mechanisms to minimize unemployment.
While these points are well-taken and areas where Germany provides an excellent model, Sharma’s main reason for predicting Germany’s ascendancy is its relatively low debt levels. It is difficult to see why debt levels should be a major impediment to the United States or China, or other countries that print their own currencies. The current interest rate on long-term government bonds in the United States is 0.6 percent, which is higher than the negative 0.5 percent rate on German bonds, but it is difficult to see how it would be a major impediment to future growth. When the United States had budget surpluses at the end of the 1990s, the rate on 10-year Treasury bonds was near 5.0 percent.
If we want to look at everyone’s debt basket case, Japan is currently paying 0.03 percent interest on its 10-year Treasury bonds. Again, this is higher than Germany’s rate, but the interest burden is hardly a major strain on Japan’s economy, even with its debt to GDP ratio of 250 percent.