Should-Read: Simon Wren Lewis: Whatever Happened to the Government Debt Doom Spiral?

Should-Read: Simon Wren Lewis: Whatever Happened to the Government Debt Doom Spiral?: “A number of people… are puzzled about why government debt at 90% of GDP seemed to cause our new Chancellor and the markets so little concern when his predecessor saw it as a portent of impending doom…

…The 90% figure comes from a piece of empirical work which has been thoroughly examined, and found to be highly problematic. (Others have used rather more emphatic language.) Part of the problem is a lack of basic thinking. Why should the markets worry about buying government debt?… The answer is that they worry about… government defaults. If a government cannot create the currency that it borrows in, then the risk of default is very real…. The situation is completely different for governments that can create the currency that the debt they sell is denominated in. They will never be forced to default… If the burden of the public finances gets too much… [they] start monetising debt…. With QE we have had actual money creation, and it has not worried the markets at all. It seems hard to tell a story where markets panic today about the possibility of monetisation in the future, but are quite sanguine about actual monetisation today…. For economies that issue debt in currency they can create, there is no obvious upper limit anywhere near to current debt/GDP ratios when economies are depressed and inflation is low…


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