How to pay all this debt, a pre-medieval perspective

What allows Portugal to finance at a utopian cost is a heterodoxy in monetary policy, which was confidently reinforced with the arrival of the pandemic.

The Minister of Finance this week presented the general features of the State Budget proposal for 2021, which included the projection of a debt-to-GDP ratio of 2020 of practically 135%. A historic maximum for Portugal in this metric and that, legitimately, leads many Portuguese to raise the question: how are we going to pay all this debt? The memory of the sovereign crisis of 2010 and 2011, in which we were forced to “tighten the belt”, is still fresh and that is why this issue is frightening.

Iremos ter que novamente apertar o cinto (que na verdade nunca foi realmente desapertado)? Esperam-nos sufocantes aumentos de impostos, taxas e taxinhas? O pequeno suspense criado por estas questões é ligeiramente malicioso, por isso deixo já uma rápida resposta: for now no and, as the Budget proposal reveals, we can even expect an anticipation of our income (although not necessarily an increase in this).

Strange as it seems given the recent experience of the sovereign crisis, the rescue of the IMF, the supervision of the troika, we are very far from a similar scenario. And the best demonstration of this is the cost at which our Republic is able to finance itself (on average of the various maturities, basically 0%).

What allows this financing at a utopian cost is a heterodoxy in monetary policy, which was confidently reinforced with the arrival of the pandemic. If in the pre-Covid, unorthodox monetary policies were already being carried out, in the post-Covid these policies reveal themselves as a mere heating up for what is being implemented: a gigantic scheme of monetization of debt, globally. A scheme in which central banks create new currency to, implicitly but not directly, help to settle existing debts. They don't pay them directly, because that would create “moral hazard”, But facilitate its sanitation through a considerable increase in the amount of money in circulation.

In an economy with a total of 100 zillions in circulation, 90 zillions of debt is difficult to pay / manage. But if you increase the total money in circulation to, for example, 120 zillions, those 90 zillions, if kept relatively stable, will be easier to manage.

Making more money to facilitate the payment of debts seems like a modern monetary device but it is, in reality, of the oldest monetary schemes that exist, older than the banks themselves.

There is evidence that the silver content of the denarius, currency of the Roman Empire, dropped from about 90% at the time of Jesus Christ's birth, to less than 5% 300 years later. During this period, several Roman emperors concluded that the easiest way to pay their debts and the empire's expenses was to reduce the silver content of the new coins in order to literally manufacture more coins (if they kept the silver content they would not have enough silver for the new coins).

After the Romans (and before them too), so many others repeated this type of ingenuity. There is therefore no lack of examples of how debt monetization can possibly end, and that is why this was a monetary policy that had not been used for a long time in the most developed economies.

But against great evils, great remedies. The great financial crisis of 2008 was the first great evil, the sovereign crisis of the European periphery the second, the pandemic shock the third. Here, then, the great remedy is reinforced, in previously unimaginable proportions.


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