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Public Debt: how much is too much? - YouTube
Channel: The Economist
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the covert 19 pandemic has forced
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governments around the world
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to borrow and spend at an almost
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unprecedented rate
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between april and june america alone has
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borrowed three trillion dollars
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the largest amount borrowed in a single
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quarter since records began
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the rise in public debt has been unlike
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anything we've seen in recent history
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in the past economists have warned
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against high levels of borrowing
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but new thinking suggests much higher
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levels of debt
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might now be sustainable the fact that
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there's been such a dramatic change in
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the consensus
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makes some people nervous how much of a
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cause for concern should the world's
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rising public debt be
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governments have borrowed to finance
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their spending for hundreds of years
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at the end of the napoleonic wars in
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1815
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britain's debt was 164 percent
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of gdp and after the second world war it
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was even higher
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at 259 percent of gdp
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historically governments have borrowed
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for a few main reasons
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probably the biggest one was to fight
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wars but in the past
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100 years or so governments have
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increasingly used their debt
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as a way to try to keep the economy on
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track
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to raise money governments issue bonds
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to investors
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these are in effect ious that are repaid
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over a fixed term
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with interest at a rate that depends on
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the length of the bond
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how desirable these bonds are to
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investors depends on the country's
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credit worthiness
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they tend to be very safe assets with
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governments you can usually count on
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getting your money back
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once a bond has been uh sold by the
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government out into the market
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it can be swapped and traded as many
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times as people care to
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and that gives you a sense of how
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markets view the creditworthiness
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of the government
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government bonds are bought by many
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different investors
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including pension funds hedge funds
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banks and individual investors
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as well as a country's own central bank
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and local government
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foreign governments also buy bonds the
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biggest foreign holders of america's
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public debt
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are china and japan
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if you have a safe asset that everyone
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will accept like us government bonds
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you can sell those bonds in a crisis get
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dollars
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and then use that to make sure you don't
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get into trouble so there's quite a lot
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of potential buyers out there for
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government bonds
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and really they could end up all over
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the world
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government's willingness to issue bonds
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and increase public debt
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has changed over time after the sky-high
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debts of the second world war many
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governments were wary of going further
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into the red
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but they continued to borrow and in the
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1970s
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this was blamed for high inflation a lot
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of economists spoke to governments and
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said
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the reason you're facing these high
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rates of inflation is because you're
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borrowing so much
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it's adding too much money into the
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economy for the economy to easily absorb
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and it's pushing up prices
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that really ushered in a sea change in
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the way that governments think about
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debt
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and so the use of borrowing as a
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macroeconomic tool
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slowly petered out until we got to the
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global financial crisis
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now it's official we are in a recession
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major financial institutions have
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teetered on the edge of collapse
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and some have failed in the rich world
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the financial crisis pushed public debt
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from 74
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to around 105 in the decade following
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the financial crisis
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and in emerging economies it rose from
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roughly 35
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to 48 of gdp this ballooning debt
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caused political panic with some
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governments pursuing strict austerity
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to try to bring their budget deficits
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down during the decade that followed
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but it didn't go entirely to plan
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by about 2014 the lessons of that
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experiment began to be pretty clear
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and what we learned was austerity
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uh in a time of economic weakness hurts
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economies so much
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that it basically doesn't do any good
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the economy becomes so weak
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that you're not earning enough in tax
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revenues to make it worth it
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these problems with austerity led to new
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thinking
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in 2019 former imf chief economist
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olivier blanchard gave a game-changing
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speech
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he argued governments could borrow far
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more than previously believed
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i think the fact that there's been such
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a dramatic change in the consensus
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makes some people nervous but at the
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same time it wasn't a rash decision they
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made it was heavily influenced by what
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was going on in the world around them
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blanchard observed interest rates on
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government bonds have been falling
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making it cheap for some governments to
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borrow money
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at the same time the economy was growing
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take america the rate of nominal gdp
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growth
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which is gdp before it's been adjusted
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for inflation
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has generally been higher than interest
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rates for the past 30 years
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this matters because as long as gdp is
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growing
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faster than the country's debt is
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accumulating interest
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and governments keep additional
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borrowing in check
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then a nation can effectively grow its
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way out of debt
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at no fiscal cost mathematically it's a
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very straightforward point
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but when you're explaining this to
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governments and saying
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this is how it goes that ends up being
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quite a powerful thing
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not even a year after blanchard gave his
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speech
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coronavirus emerged in wuhan and the
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greatest exercise in public borrowing
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for generations began
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government borrowing hit a record 55
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billion pounds
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the loaning public debt around 300
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billion or 16
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of gdp but not every country
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can borrow its way through the pandemic
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almost
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every government has found it easier to
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borrow now
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than it was 30 or 40 years ago but the
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difference between
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a rich country and a poorer country
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which doesn't have a long record of
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borrowing
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on foreign markets those places can't
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get the same
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interest rates it's a source of
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significant inequality in terms of
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how countries face this pandemic that
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some places can borrow almost as much as
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they want to support their economies and
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others can
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borrowing on this scale is not without
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risk for anyone
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you owe us a lot of money what as
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there's always the threats that interest
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rates could rise again
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economists aren't entirely sure why
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these rates have been low for so long
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in general interest rates on mortgages
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government bonds
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or savings accounts are driven by demand
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if the desire to save is high then
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interest rates will be low
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as banks or governments issuing bonds
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don't have to tempt investors with
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favorable rates
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there are several factors driving the
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desire to save which might be keeping
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interest rates down
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the aging population might be one cause
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as people
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tend to save for retirement and pension
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funds by government bonds
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and fear of global financial instability
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may also play a part
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causing investors to seek safe assets
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like bonds
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we can't be completely sure why exactly
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it's happened and that matters because
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if you can't be certain why it happened
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in the first place
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you can't say for sure that it's not
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going to reverse itself at some point in
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the future
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uh which would be a big deal you know if
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interest rates suddenly soared
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then all the countries that had
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accumulated a lot of debt would suddenly
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be in very big trouble
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despite these risks the pandemic has
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left many countries with no
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option but to keep borrowing
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to cut deficit spending now while the
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global economy is still crippled by the
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pandemic
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would inflict lasting damage but how
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much
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and how long countries can continue to
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borrow is unclear
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and the colossal debt built up in the
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past six months
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will be one of the greatest legacies of
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the pandemic
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i'm ryan avent the economics columnist
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at the economist
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we've written a series of articles that
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cover the basics on a range of economic
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topics
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and how the latest thinking about them
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is evolving you can read more at the
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link opposite
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thank you for watching
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you
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