Snapshot of US federal debt projections
By now, it’s old news to anyone paying attention that the federal debt, based on current law, is on a trajectory to rise in an unsustainable way over the next few decades. What is less well-known, I think, is the extent to which these forecasts for rising federal debt rely on interest payments soaring out of control. The message comes through clearly in the Congressional Budget Office report “The 2020 Long-Term Budget Outlook” (September 2020).
Where Federal Debt is Headed and Staying Off the Interest Payments Treadmill
By: Timothy Taylor – Journal of Economic Perspectives
How to deal with COVID debt
There has been an unprecedented money creation since the onset of the pandemic: The Federal Reserve’s balance sheet went from $4,159 billion in February to $7,056 billion by the end of September, namely a $3 trillion monetary injection in 7 months. The balance sheet of the Eurosystem rose from 4,692 billion euros in February to 6,705 billion in early October, an increase of 2,000 billion. Thomas Piketty is wondering therefore whether we can expect central banks in the future to hold 50% and then 100% of public debts, thereby lightening the financial burden on States? Technically yes, but it would lead to a large increase in wealth inequality. Instead, argues Piketty:
[M]oney alone cannot offer a peaceful solution to a problem of this magnitude, because it leads in one way or another to uncontrolled distributive consequences. It was by resorting to exceptional levies on the better-off that the large public debts of the post-war period were extinguished and that the social and productive pact of the following decades was rebuilt.
What to do with Covid debt?
By: Thomas Piketty – Paris School of Economics
Conservative, moderate and liberal views on public debt
This is a very interesting webinar organized by the Manhattan Institute, a conservative think tank. The panel discussants are John Cochrane (conservative), Raghuram Rajan (moderate) and Simon Johnson (liberal). Highlights from the discussion:
Simon Johnson: We are in a “survival economics” phase and the government needs to be generous and buffer the private sector from the shock. Without help we risk losing future output. The worry is that we have reached a point where people even during the good times think that debt doesn’t matter and therefore no measures are taken even during booms.
John Cochrane: We should not focus on how much we spend but instead on whether we are spending it wisely. There will be big shifts and we don’t want to keep every business open: in the case of corporations government spending doesn’t really help their employees but instead bails out the bondholders. The US debt is financed with short term debt which could lead to a surprise increase in interest rates.
Raghuram Rajan: It’s important to think how the money is spent especially since all this debt, despite other beliefs, will indeed be paid by future generations. Spending wisely means helping the middle size firms which can’t get help from the government or credit for the market but at the same time employ a large number of people. Markets give industrial countries more room for fiscal spending because the politics in these countries are considered stable. But politics in advanced countries are deteriorating and hence the certainty that their debt is sustainable will start fading.
Exploding Public Debt: Consequences For Fixed Income Markets And Future Fiscal Policy
Webinar with: John Cochrane-University of Chicago, Simon Johnson-MIT, Raghuram Rajan-University of Chicago
