As monetary authorities around the world race to make things “easier” and provide almost unlimited liquidity in the face of decelerating growth, they are getting very little help from government bureaucrats. Many, like the IMF (International Monetary Fund), have gone so far as to suggest that it is massively irresponsible to rely so heavily on monetary policy alone. Given that governments generally like to spend taxpayers’ money, why the hesitancy? Well, this is potentially a complicated question with very country-specific explanations. For instance, in our opinion, extremely partisan politics have made it very difficult to get anything of substance done for many years in the US. Disappointingly, both sides find it hard to agree on spending that isn’t perceived as helping likely supporters and their associated causes.
Germany is an extreme, but an illustrative example. According to a Bloomberg article, yields are now below zero for 85% of German sovereign debt and Germany could finance spending for the next decade at an interest rate of less than -0.4%. Perhaps more than any other country, shouldn’t Germany be taking advantage of a very unusual circumstance — being able to access ultra-cheap cash when demand for its government bonds is so strong? Yet, Germany continues to run a budget surplus and continues to reduce its total debt burden that is at the low end of industrialized countries at roughly 60% of GDP.
In fact, there are concerns by some that Germany could actually cut spending as economic activity wanes. Of course, some of this is cultural. Given the hyperinflation of its past, it is well-recognized that the German people do austerity better than almost any other country.
However, as the chart below indicates, the Germans have chronically underinvested in its infrastructure which could hold back its future growth.
For instance, while it seems hard to believe, the IMF recently indicated that the digital infrastructure in Germany needs a significant upgrade, with only 2.5% of broadband internet connections using fiber-optic cable – in 2019!
France has recently become more vocal in encouraging Germany to lighten the reigns a bit and spend more to benefit the Euro region as a whole. Ironically, they will likely be the first to call on the safety of the German balance sheet should economic conditions get substantially worse.
While we are not advocates of unlimited government spending or the likes of Modern Monetary Theory, we do think that the responsibility for certain collective goals (like infrastructure) are most efficiently borne by the government. And a controlled balancing of fiscal responsibility with the maintenance of appropriate infrastructure to secure future economic growth seems like the best approach.
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