Spiralling Government Debt Isn’t a Choice

The ECB were justified in panicking about the threat of deflation. An environment that is simultaneously debt laden and has falling prices will quick devolve into a crisis, as revenues and wages will struggle to cover interest payments on previously accumulated debt. Interest payments definitely do not fall in sympathy with prices therefore deflati

Item #1: Fiscal Deficits

U.S. fiscal deficits were huge in 2020 and 2021, but contracted in 2022 as most of the emergency programs dwindled.

However, by 2023, fiscal deficits began rising again , mainly due to increased interest expense. This is where fiscal dominance became rather sustained: the Fed’s interest rate hikes, which were meant to slow

If Congress and the president decided to lay out a real (and credible) plan to reduce the deficit over time, say five or six years, to where it was less than nominal GDP, the bond market would (we think) behave. Reducing deficits by $150 billion a year through a combination of cuts in growth and spending would get us there in five years.

I argue that they are both necessarily caused by institutions and policy, whether these are policies and institutional frameworks in the deficit countries, policies and institutional frameworks in the surplus countries, or both.

The first is our best-case scenario, although for the reasons I have noted it is unlikely to describe conditions today, especially in capital-rich countries like the U.S. The second and third ways are unsustainable because they actually destroy value by increasing debt faster than they increase debt-servicing capacity.