Spiralling Government Debt Isn’t a Choice

A country with well over 100% debt-to-GDP has two main choices in this scenario. The first choice is that they can keep interest rates very low despite periods of price inflation that occurs, and debase all of the currency holders and bond holders. Japan is far enough into fiscal dominance that they’ve chosen that route. The second choice is that t

First, the world can embark on a surge in productive investment, probably but not necessarily directed by the state because the private sector might not be in a position to capture the full benefits of investment and so will not have the incentive to invest. Second, we must reduce the income share of the state and of the rich. Or third, we must acc

This squares solidly with the work done by Rogoff and Reinhart, showing that when the debt of a country reaches about 100 percent of GDP, there is a reduction in potential GDP growth of about 1 percent. As we wrote earlier, government debt and spending do not increase productivity. That takes private investment. And if government debt crowds out pr

Deficit country austerity may indeed be part of the correct prescription, but if it is not more than fully matched with surplus-country reflation, it cannot possibly succeed without a sharp rise in global unemployment.

If public debt is unsustainable and the burden on government budgets is too great, what does this mean for government bonds? The inescapable conclusion is that government bonds currently are a Ponzi scheme. Governments lack the ability to reduce debt levels meaningfully, given current commitments. Because of this, we are likely to see “financial op

Because it will be almost impossible to do these quickly, as a stopgap countries with productive investment opportunities must seize the initiative in a global New Deal to keep demand high as the structural distortions that force up the global savings rate are worked out.