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Regardless of who wins the US presidential election, the next leader will start his term with record government debt. The pandemic has dealt a significant blow to government finances around the world. For some countries, such as the US and Japan, their central banks can help buy time before a debt reckoning. For others, painful austerity measures could be hard to avoid.

With business revenues wiped out by lockdowns, public sector grants and loans are a lifeline for companies. Job protection payments also support low-income families by putting food on the table. Without such measures, many companies could be forced out of business, and families could see their living standards decline dramatically, even if they are spared illness from Covid-19.

As important as they are, these policies are very costly for governments.

The International Monetary Fund estimates that US$11 trillion in fiscal spending has been announced. Half is additional spending or taxes and fees that will not be collected, and the remaining half takes the form of liquidity support, such as loans to businesses, equity injections and guarantees.

The IMF has estimated that the US government debt-to-gross-domestic-product ratio could jump from 109 per cent last year to 141 per cent this year. The rest of the developed world may face similarly sizeable fiscal shortfalls.

Borrowers deep in the red are less likely to repay what they owe. Lenders charge higher interest rates for higher-risk loans. The good news is that many highly indebted governments have central banks on their side to keep interest rates low, at least for now, making their debt loads more affordable.

In the years following the global financial crisis, from 2009 to 2014, the Federal Reserve bought about US$2 trillion worth of US government bonds. More recently, it bought US$1.7 trillion worth of these debts in just four months, from late February. The European Central Bank, Bank of Japan and Bank of England have all stepped up their bond buying to keep government bond yields low.

Traditional economic theory would tell you that printing money to pay for debt is a bad idea. The economy will overheat from all the extra money sloshing around and the extra demand from government spending. This risks a surge in inflation and a loss of public confidence in the currency, eventually prompting capital flight.

To ward off such consequences, central bankers have repeatedly stressed that their measures are only temporary and will be removed once economic growth rebounds.

The reality is somewhat different. Reversing these policy support measures and curtailing debt will prove very difficult. Selling government bonds bought by central banks would mean higher borrowing costs for governments. Governments would have to raise taxes and cut spending to finance their debt, stunting growth.

It is difficult to see politicians adopting these policies voluntarily. Higher taxes and spending cuts are rarely popular with voters. There is also a growing band of politicians, especially in the US, who think central banks printing money to fund government spending is actually a plausible idea. These supporters of so-called Modern Monetary Theory point to Japan.

The Bank of Japan owns over 40 per cent of all Japanese government bonds outstanding after years of buying, despite failing to generate any sustained momentum in inflation. Aggressive money printing in the US and the euro zone after the financial crisis also failed to park runaway inflation. The global statusof the US dollar also gives the Fed more leeway in funding the government. As the world’s most liquid reserve currency, investor confidence in the US dollar is second to none.

It is a different case for emerging markets though, where only a handful of economies opt to buy bonds to tamp down yields. And when, like Indonesia, they do, they keep their interventions modest. They worry that aggressive money printing would undermine confidence in the local currency and cause capital flight.

With eye-wateringly high government debt backing central banks into a corner, it is difficult to see them reversing ultra-supportive policies in a meaningful way soon. Raising interest rates, even when the pandemic is under control, will be a long drawn-out process.

Do not forget that the Fed was only able to raise rates by 2.25 percentage points before being forced to cut them again because of the negative effect of

US-China trade tensions. It may help bolster much-needed fiscal support for recovering economies, but US and Hong Kong savers facing very meagre interest rates will be left hunting for yield.

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