Ever since I stopped being a wee'un, I have heard that one should not use expansionary fiscal policy to rebalance the economy because of the dangers of public debt accumulation. Somehow, there was never an analogous focus on how rebalancing the economy through monetary policy might produce greater dangers of private debt accumulation. Until now: Martin Wolf: How Our Low Inflation World Was Made: "If we are to make sense of where the world economy is today and might be tomorrow, we need a story about how we got here. By 'here', I mean today’s world of ultra-low real and nominal interest rates, populist politics and hostility to the global market economy. The best story is one about the interaction between real demand and the ups and then downs of global credit. Crucially, this story is not over...

...We should not be that surprised by this world of persistently weak inflation and ultra-aggressive monetary policies, including outright asset purchases by central banks and favourable long-term lending to banks. Ray Dalio of Bridgewater has laid out the logic in his important recent book Principles for Navigating Big Debt Crises.... Governments of countries whose debts are denominated in their own currencies can manage the aftermath of a crisis caused by excessive credit... spread out the adjustment over years... “beautiful deleveraging”... [via] austerity; debt restructuring and outright default; money “printing” by central banks, not least to sustain asset prices; and other transfers... keeping long-term interest rates below growth of nominal incomes. That has in fact been done, even for Italy....

Where has this left us today? Not where we would like to be.... While financial and household debt have fallen relative to incomes... that is not true for debts of governments or non-financial corporates.... Offsetting debt explosions.... Crisis-hit economies are still far below pre-crisis trend output levels, while productivity growth is also generally low.... Populist politics of left and right remain in full force.... Big debt crises... have always thrown long shadows into the future...


#noted #2019-10-12

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