Global Debt Binge Sparks Fears of Fiscal Train Wreck

The global economy is at risk of a fiscal train wreck due to reckless government spending and debt accumulation.

According to Robin J Brooks, there's no science that tells us when markets pull the plug on fiscal policy. One moment they're happy to buy all the debt issuance - at low interest rates - that comes with big budget deficits. The next they want higher yields because they worry things are heading for a debt crisis.

The global COVID-19 pandemic led to huge deficits worldwide, and now we're seeing the adverse consequences of this global debt binge. Brooks notes that since the pandemic, fiscal policy has come untethered, with many countries running deficits that are unusually wide for a non-crisis period.

The combination of rising longer-term yields, unmoored fiscal policy, and unstable geopolitics is pushing government bond yields up all around the world. Brooks believes this trend will continue and that the 'debasement trade' has further to run, with safe havens like gold and currencies like the Swiss Franc and Swedish Krona continuing to rise in value.