Unprecedented government interventions to offset the economic impact of Covid-19 have driven the level of global debt close to the peaks seen in the second world war, according to Goldman Sachs.

Economists say this raises big questions about how the burden of servicing the debt mountain will be shared; how the related surge in bond issuance will affect markets; and what the long-term impact on growth will be. Some of those knock-on effects have already been seen. In April, credit rating agency Fitch docked Italy on concerns over the sustainability of its debts, tipped to rise this year to more than 150 per cent of gross domestic product.

Harvard economist Kenneth Rogoff has written extensively on the role of excessive debt in financial crises. In this case, however, he sees the borrowing as necessary.

“I would have no problem with policymakers taking the same actions twice over if it means we get out of this in one piece,” Mr Rogoff told Goldman. While rising debt was not a free lunch, he said, “that doesn’t mean we shouldn’t be buying lunch for everyone right now. We should be”.

In recent years, several economists — among them Atif Mian, Ludwig Straub and Amir Sufi — have argued that financial crises are not the only risk posed by high levels of debt, relative to GDP. Huge debts are also a drag on economic growth, because borrowers who pay the interest and the lenders who collect it use their money differently.

Borrowers tend to be less wealthy, so when they receive an incremental dollar, they tend to spend it. This creates demand, and stimulates investment to meet that demand.

Lenders are generally the wealthy, or governments of countries with excess savings such as Germany and China. Such lenders tend to save dollars they receive — adding to the global savings glut, rather than stimulating demand or investment. This has the effect of driving down interest rates, which encourages yet more borrowing. And so the cycle continues: debt rising, demand dwindling and growth falling.

“The secular trend is unsustainable because it is going to lead [the world] to become like Japan, with growth that is sub-par,” Mr Sufi recently told the Financial Times.

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