Playing with lots of money

The aid packages in the Corona crisis are becoming more and more expensive. How Much Debt Can We Afford? This historically new situation is tempting.

With the national debt after the First World War, hyperinflation came in 1923 - and the Germans piled their money in the basement.

Dhe Dutch are not really into debt. Your government has written that on its calling card. In the EU, they are among the “thrifty four”. Your Prime Minister, Mark Rutte, likes to make it clear when the South is asking for money again. At home, the Dutch show how disciplined housekeeping works. Their debt ratio, that is, the ratio of debt to economic output, recently even pushed them below 50 percent. But now everything is different: the government plans to spend an additional 46 billion euros this year, the finance minister announced in his traditional speech on “Prinsjesdag” this week. The debt ratio jumps to 62 percent.

After years of saving, dams are breaking everywhere. Spending money like there’s no tomorrow is the motto. We’ll think about the bill later. The federal government pulls out the “bazooka”, the Bundestag nods a new debt in the record amount of 218 billion euros. And the EU is putting 750 billion euros on top of that for the reconstruction fund. There has never been such a glut of state money as now in the Corona crisis. And nobody protests against it.

The new generosity is urgently needed. Experts agree on this. If the state did not support the economy now, the consequences would be catastrophic. Companies would go bankrupt in a row, and unemployment would rise rapidly.

But rescue is not free. Debt ratios are skyrocketing everywhere right now. With an expected increase from 60 to 80 percent, Germany is still doing comparatively well. The United States passed the 100 percent threshold in June. Since then, their mountain of debt has been greater than their annual gross domestic product. In Italy, the government expects an increase from 135 to 160 percent. And in Greece, the European Commission estimates that the debt burden is likely to rise to 196 percent of economic output.

The specter of hyperinflation

The question arises: Can the states continue to spend money? Or will there ever be a point where they collapse under the weight of their debts?

There is no simple answer to this. Economists have tried several times to find a “golden rule of national debt”, but without success. History shows that one cannot determine from a single number whether a state is threatened with bankruptcy or not. Japan has been able to cope with a debt ratio of more than 200 percent for years. Greece went into insolvency ten years ago with far less debt. And in Germany one thinks with horror of the hyperinflation almost a century ago, when the First World War was financed, among other things, by issuing “war bonds” and then the calamity took its course: The debts grew, some goods became scarce Prices soared, and reparations payments accelerated the process. Until at some point there were banknotes in circulation that were supposed to be worth ten billion marks, but for which little more than a loaf of bread could be got.