"Good debt, bad debt"

CEO Ernst Prost explains why the government may contract new debts in good conscience in order to boost economy - unlike 10 years ago.

Dear fellow entrepreneurs!

Ten years ago, I took a strong stand against national debt, I still remember how I scourged all kinds of politicians because they can do nothing other than incur debts. So why did I say yesterday "whether it's one or two trillion euros more debt, it doesn't matter, on the contrary, it's right to take on more debt to face the crisis"? The calculation is simple and the background to my paradigm shift is even easier to explain: A good ten years ago - to put it simply - we were, in my view over-indebted. Our gross domestic product, Germany's economic output, was 2.5 trillion euros, during this time we had a total debt of around 2 trillion euros, this results in a debt ratio of around 80%. The interest we had to pay on this debt amounted to 33 billion euros in 2010 and in 2008 it was even around 40 billion euros! This money was of course missing in other places...

What was the situation for last year in 2019? We still have debts of around  2 trillion euros. We have reduced some debt but basically it is the same debt level as in 2010, when a debt brake was introduced consistently and correctly. Our gross domestic product, Germany's economic output, has shown a fantastic upward trend, from EUR 2.5 trillion to an incredible EUR 3.4 trillion. Consequently, our debt ratio has also fallen from 80% to 60%. By way of comparison the USA has a debt ratio of 110% and Japan even has a debt ratio of 240%. 

So now with far more economic output, we still have the same debts - this improved ratio is not bad, and how have our interest payments developed? After all, it is these financing costs for loans that burden the federal budget every year. As already mentioned above, we paid around 40 billion euros in interest in 2008 and around 33 billion euros in 2010. And in 2019? At that time, we were only at 12 billion euros... Very good! Do you see this double effect? Debt standstill (if you like) with significantly higher economic output! And interest payments dramatically reduced thanks to low interest rates. Great! Conversely, of course, this also means room for new debt, which we absolutely must make in order to end this crisis and create a new upswing. Money costs nothing, as I wrote yesterday - yes, in some cases we even have the curious case, due to the negative bond interest rate it generates money for the government instead of costing money, because the interest rates are negative for investors. So there is no better way to have it...

Now a last look at the interest payments and the federal budget over the last 10 years: From this you can see how much of the yearly budget was spent on debt service, that is interest payments. The federal budget ten years ago was about 320 billion Euros and, as described above, 33 billion Euros were spent on debt interest. Last year's budget was about 350 billion euros, which is quite a bit more, but the interest was only 12 billion euros! From this point of view we have room for government spending on investment to stimulate the economy. Not to spend it on nonsense but to pick up speed again. The public authorities must now put money into it and as I said with the current interest rate landscape we could even manage with doubled debt, from two to four trillion euros, without having to make much higher interest payments. 

What could the government and the economy do with EUR 2 trillion? Renovating bridges, modernizing schools, revamping the education system, strengthening the health system in the wake of this pandemic, making the switch to renewable energy, and so on and so forth. Tasks for which money is needed but which also create jobs and at the same time benefit society as a whole and our collective future. Full employment and a prospering economy are, incidentally, absolutely essential prerequisites for bubbling tax revenues .That is what the welfare state wants, among other things - and what it also urgently needs to provide for all citizens and to carry out all tasks.

Yours

Ernst Prost