José Manuel Suárez Mier
According to many neo-Keynesian economists, economics underwent an intellectual revolution about the role of public debt. They say that advanced countries should seize the opportunity of low-interest rates to borrow and spend without limits to fuel their economies.
I am not referring to the proponents of “modern monetary theory” who created a magical world in which resources are infinite. Central banks can issue all the money they want without spending it because they are in the realm of anti-economy.
Those who propose the new paradigm are Nobel laureates, like Stiglitz and Krugman, or have held high positions, like Summers (Treasury), Furman (Presidential Councilor) and Blanchard (IMF), and all of them illustrious teachers from Harvard, MIT, and Columbia, who found the Philosopher’s Stone!
They claim that, although the future is unknown and that the precise reasons for the drop in real rates of interest are not clear, they support this is due to structural changes in the economy that require supplanting thinking about economic policy, as happened when Keynesianism was abandoned as a result of the stagnation with inflation of the 1970s.
Their analysis starts from observing that the fall in rates coincides with massive increases in public deficits, an expansion in social security coverage, and a sharp drop in capital taxes, all of which should lead to higher interest rates if the private sector’s behavior had not altered.
According to them, this is due to the greater supply of savings due to expectations of longer life, growing uncertainty, and inequality in the distribution of wealth. Simultaneously, the demand for capital falls due to demographic and technological changes that affect consumption patterns and business behavior.
This explanation reminds me of the title of the great text by Reinhardt and Rogoff: This Time Is Different: Eight Centuries of Financial Madness, which held that every time the business community denied that there was a financial bubble about to burst, they argued that now the circumstances were different and that there was a problem.
How much debt can the government issue? It is not enough for the issuer to ensure that it can pay the interest because it must also show that it can repay the principal and renew its debt without a problem, which requires that whoever acquires it has the certainty that the government will have sufficient resources to cover its debts with the income that it will receive in the future.
Many emerging markets have faced the inability to place their debt, despite offering high-interest rates, by losing the confidence of the markets to replace with new issues the debt that is being amortized.
The danger that advanced countries face of continuing to borrow without measure is a major financial crisis, with enormous uncertainty and high inflation, which would be the only way to extinguish their debt, burdening the poorest.
Consultant in economics and strategy in Washington DC and professor at universities in Mexico and the US Email: [email protected]
This column is also published in Spanish on December 11, 2020, in the Excélsior newspaper, based in México City.