How sure can investors be that XLI][MPPGSQIǻVWXMRPMRIMR the next crisis, as they did in 2008? Will the United States government again put Wall Street before Main Street and honor debts to China ahead of obligations to pensioners? time, this was not a good predictor of whether the surveyed countries were safe from interest- rate spikes in a crisis. Last but not least, how sure can investors be that they will come first in line in the next crisis, as they did in 2008? Will the United States government again put Wall Street before Main Street and honor debts to China ahead of obligations to pensioners? Modern economies have many important uses for debt. But it is never a risk-free option for governments, which is why it should be taken on and managed wisely, even when rock- bottom borrowing costs prevail. © Project Syndicate
education) that more than pay for themselves in the long run. As long as governments adhere to sound debt-management criteria, balancing risk and cost when choosing maturities, today’s ultra-low interest rates offer great opportunities. But the broader claim that issuing government debt has become a veritable free lunch, similar to government profits from currency issuance, has been dangerously overblown. If the aim of government policy is to reduce inequality, the only sustainable long-term solution involves raising taxes on high earners; debt is not a magic shortcut for giving to the poor without taking from the rich. True, in many advanced economies, current real (inflation-adjusted) interest rates on government debt are below the real rate of economic growth. Presumably, therefore, governments can take on much more debt without ever having to raise taxes. After all, as long as income is growing faster than the stock of public debt, simple arithmetic shows that the ratio of debt to GDP (income) will fall over time. Yet, things are not quite so simple. Interest rates are ultra-low in part because global investors are starved of “safe” assets that will still pay out in the event of a sharp downturn or economic catastrophe. But can governments in fact provide that insurance for free if there is a risk that interest rates will rise in the next major systemic crisis? A recent International Monetary Fund study of 55 countries over the last 200 years showed that although economic growth exceeded interest rates on government debt almost half the
0IRRIXL7SKSǺ , professor of economics and public policy at Harvard University and recipient of
the 2011 Deutsche Bank Prize in Financial Economics, was the chief economist of the International Monetary Fund from 2001 to 2003. He is co-author of ĚĞžƐĞķåƐĞžƐ%ĞýåŹåĻƒ×Ɛ Eight Centuries of Financial Folly and author of The Curse of Cash .
American Consequences
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