Pandemic, Massive Debt, and Gold

In our previous article, we highlighted the link between the current coronavirus pandemic and how this can translate into rising public debt in many countries. We also pointed out that gold is likely to take advantage of this situation. In this analysis, we will supplement the above by showing you how much debt is likely to increase in selected countries.

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

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

The US is less indebted and less hit by COVID-19 (at least so far), but their economy is also projected to shrink by 2020. The combination of lower GDP revenues and higher-cost taxes public debt will increase the deficit and Federal debt from just over $ 23 trillion, or 107 percent of GDP, in 2019 to almost $ 26 trillion, or more than 120 percent of GDP, in 2020.

Now, that means we have a serious debt problem. How can all these countries pay off all their debts? Well, they can raise taxes. It could happen in the US if a Democrat gets the White House. However, taxes are already high and unpopular. So governments can also accelerate economic growth – but it is very difficult to take into account pre-pandemic trends and accelerated response. And if they raise taxes, growth will certainly not accelerate. So the only option left – and most likely from a historical point of view – is to inflate the debt. Financial pressure with the collection of mandatory investments in “safe” assets, which are guaranteed not to go with real or mass inflation data.

With higher inflation, the real value of government debt will be lower. And central banks have already eagerly started buying government bonds with newly created reserves. This means that one of the important implications of the current pandemic and the subsequent policy response will be higher inflation. Probably not immediately, as the negative shock of demand will create a deflationary pressure (although the negative shock of supply creates inflationary pressure), but we should not neglect the threat of inflation. This means only one thing: when the dust settles and investors understand what is happening, they will return to the last protection of inflation – gold.