When interest rates are near zero, government debt doesn’t matter.
That was the theory at least, in the previous decade, not just from economists on the fringe but also from a few in the mainstream. If rates stayed low, the argument went, the US didn’t need to worry about debt.
And it didn’t. Debt increased, and economists who cautioned against it (ahem) were dismissed as cranks, with many of our critics pointing to the history of one nation: Japan, which managed to keep interest rates low even as its debt grew to more than 200% of its GDP.
Reality, however, has a way of catching up with theory eventually, and now it has for Japan, whose long-term bond yields are rising as the yen is depreciating. The Japanese experience, it turns out, is not an excuse to run up lots of debt. It is a cautionary tale.
Continue reading the entire piece here at Bloomberg Opinion (paywall)
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Allison Schrager is a senior fellow at the Manhattan Institute and a contributing editor of City Journal.
Photo by Yuichiro Chino/Getty Images