Carmen Reinhart and Ken Rogoff (2013): Austerity Is Not the Only Answer to a Debt Problem: "Ultra-Keynesians would go further and abandon any pretence of concern about longer-term debt reduction. This position has been in the rhetorical ascendancy in recent months.... It throws caution to the wind on debt.... The basic rationale is that low interest rates make borrowing a free lunch. Unfortunately, ultra-Keynesians are too dismissive of the risk of a rise in real interest rates. No one fully understands why rates have fallen so far so fast, and therefore no one can be sure for how long their current low level will be sustained...

...John Maynard Keynes himself wrote How to Pay for the War in 1940 precisely because he was not blasé about large deficits–even in support of a cause as noble as a war of survival. Debt is a slow-moving variable that cannot–and in general should not–be brought down too quickly. But interest rates can change rapidly.... Economists simply have little idea how long it will be until rates begin to rise. If one accepts that maybe, just maybe, a significant rise in interest rates in the next decade might be a possibility, then plans for an unlimited open-ended surge in debt should give one pause.

What, then, can be done? We must remember that the choice is not simply between tight-fisted austerity and freewheeling spending. Governments have used a wide range of options over the ages. It is time to return to the toolkit. First and foremost, governments must be prepared to write down debts rather than continuing to absorb them. This principle applies to the senior debt of insolvent financial institutions, to peripheral eurozone debt and to mortgage debt in the US.... So-called “financial repression”... governments cram debt into domestic pension funds, insurance companies and banks. Europe is there already–and it has been there before, several times. How to Pay for the War was, in part, about creating “captive audiences” for government debt. Read the real Keynes, not rote Keynes, to understand our future...


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