COVID-19 Effects on Debt Levels and Inflation


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Les Nemethy looks at how the pandemic’s path might evolve and what the impact of that could be on the global economy.

You may recall that at the beginning of March 2020, I wrote an opinion that many considered outlandish at the time, that COVID-19 deaths in the United States alone may surpass a million.

I only wish I were wrong, but U.S. fatalities have topped 735,000 and are still rising as of mid-October. According to the Economist, there have been more than 16 million “excess deaths” worldwide, probably attributable to COVID-19.

Allow me first to summarize the scenarios that I see for COVID moving forward and then about their impact on financial markets and the economy.

Most experts think that COVID-19 will eventually become endemic like the flu, always present but with “acceptable” levels of fatalities. But there are many paths to becoming endemic.

The best scenario is that COVID-19 relatively quickly fades into endemic status. The worst scenario is that, before we get there, one or more vaccine-resistant viruses emerge that spread faster and/or are more fatal than even the Delta version. And of course, there are countless intermediate scenarios.

Unfortunately, the probability of new, faster, and/or more lethal variants emerging is considerable. The number of people carrying the virus continues to expand globally: the more humans have the virus, the more colonies exist, increasing the chances of mutation.

Eventually, a strain may emerge that will displace the Delta variant as the globally dominant strain. 

Let’s look in a little more detail at the worst-case scenario. The spread of a vaccine-resistant worse-than-Delta variant would begin with only a few cases in absolute numbers (think back to Q2 2020) but would spread exponentially.

This would provide virologists and vaccine producers some time to (a) identify and isolate the virus, (b) provide a genetic footprint of it, and (c) implement large-scale manufacturing and distribution. (All previous vaccine stocks would be useless against the new variant).

It would be a race against time. While one might argue that the above process would be faster because vaccine technology and production capacity have advanced with lightning speed over the past two years, as of October 2021, still less than 50% of the global population has received one jab. A new, highly deadly, and faster-spreading vaccine-resistant variant has the potential to wreak global havoc.  

Economic Impact

Financial markets seem to have shrugged off COVID-19 and continue to proceed from all-time-high to all-time-high. Specific sectors, like technology, even appear to have benefited from the virus (for example, through accelerated adoption of digitalization).

Given the high degree of uncertainty about the course of the virus and the hardship still wrought by it, governments might be forgiven for failing to enforce fiscal discipline. There have been unprecedented levels of stimulus, handouts, bank guarantees, deficits, etc.

Perhaps the most pervasive financial effect of the virus will be an accelerative effect on debt accumulation. (Global debt now exceeds 350% of global GDP.) Similarly, central banks have not raised interest rates to quash inflation.

All of the above assumes a relatively benign course for the virus. Should a vaccine-resistant strain emerge that spreads faster or is more lethal than Delta, the effects could be still more severe.

Travel and tourism may once again come to a standstill. Lockdowns might be imposed, as in the spring of 2020, dramatically curtailing economic activity. 

However, unlike spring 2020, when there was no light at the end of the tunnel (i.e., a vaccine that might restore some semblance of normality), lockdowns might be relatively short-lived, in the expectation that these would serve to bridge the gap until new vaccines could be distributed in sufficient quantities.

Compared to the benign scenario, such a worst-case scenario would likely result in further accelerated stimulus and debt accumulation.

The above worst-case scenario would be for the developed world. Presumably, the lag in providing vaccines to the developing world would not change, meaning these countries would bear the brunt of a vaccine-resistant outbreak. (Nor do many developing countries have the financial strength to permit massive stimulus/deficits).

Assuming the new mutation would spread fast in the developing world, the cycle repeats itself, and even newer, more resistant variants might emerge. It illustrates that the only reasonable response to an epidemic is a global one, sorely lacking until now.

The rapid accumulation of debt and the acceleration of inflation as legacies of COVID-19 cannot be underestimated. These will be the defining financial issues of the coming decade. High debt levels create economic instability and volatility (thus increasing the chances of a financial crash).

I am not for a moment suggesting that central banks and governments are blame-free, and all the responsibility can be heaped on the pandemic. But the virus has played a role in facilitating such profligate behavior.

Les Nemethy is CEO of Euro-Phoenix Financial Advisers Ltd. (, a Central European corporate finance firm. He is a former World Banker, author of Business Exit Planning (, and a previous president of the American Chamber of Commerce in Hungary.

This article was first published in the Budapest Business Journal print issue of October 22, 2021.

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