National debt crisis will be averted by governments 'mobilizing and encouraging' private wealth to fill their budget holes, says UBS | Fortune

"When examining the flow of wealth in the coming decades, privately wealthy individuals rest in a very healthy position. Their assets have increased in value, their portfolios have performed well, and many are looking to the generations above them for a significant windfall of cash set to come from inheritance. Governments, with their eye-watering debt burdens and expensive borrowing costs, are eyeing that wealth-and they want in."

"Governments have long mobilized private wealth to support public finances. There are several approaches. One is to influence market behavior-encouraging individuals to buy government bonds through incentives like tax-free premium bonds, which channel savings directly into state financing. Prudential regulation can also steer pension funds toward domestic government debt, as seen in the UK after 1945, when a debt-to-GDP ratio of 240% was successfully reduced over decades."

"It is this debt-to-GDP ratio that has economists so concerned, rather than the volume of debt itself. After all, the ratio is a useful indicator of whether an economy is growing fast enough to generate the revenues necessary to repay its debts-or the interest payments on its debts-to lenders. If the customers buying a government's debt feel the ratio is unbalanced, they may demand higher interest to offset the risk and so push the government's budget even further."

Privately wealthy individuals stand to receive large inheritances as asset values and portfolio performance have risen, leaving many positioned to gain significant cash transfers. Governments face high debt burdens and costly borrowing and are seeking to tap private wealth to shore up public finances. Policymakers can use incentives such as tax-free premium bonds to channel individual savings into state debt or apply prudential regulation to direct pension funds toward domestic government bonds, as occurred in the UK after 1945. The key metric is the debt-to-GDP ratio because lenders may demand higher interest if that ratio appears unsustainable, and increasing individual buyers through incentives can let governments borrow more without higher market rates.

Read at Fortune