Those who want to receive complimentary subscriptions to the newsletter should write to me at stating affiliation. Twitter: systematic labor arbitrage allowed by free trade between countries of vastly different levels of living standards without exchange rates equilibrating cross trade balances inevitably increases inequality within developed countries by putting downward pressure on wages and increasing profit share of production, thus putting downward pressure on end demand, thus requiring monetary stimulus in the form of lower interest rates allowing higher debt-to-income to stimulate end demand, which fuels asset bubbles as well as the continuing trade deficit because domestic production is not competitive given labor costs and productivity at prevailing exchange rates, which translates into further production offshoring and periodic financial crisis. This, however, is a very different impact altogether.Īside from this blog, I write a monthly newsletter that focuses especially global balances and the Chinese economy. Incidentally, lower interest rates can indeed affect a country’s debt burden directly, but they do so by extending the duration of debt and effectively postponing the real cost of debt servicing. It tells us instead about the national distribution of income and whether or not its net effect is positive or negative for growth. It is only meant to point out that, at the national level, the relationship tells us very little about debt sustainability. It is much more dangerous for a country to allow its debt to rise, they argue, if r > g than if r g or vice versa. Nevertheless, a lot of analysts seem to think that this analysis also applies to the sustainability of a country’s debt burden. Other things being equal, faster economic growth will diminish the importance of wealth in a society, whereas slower growth will increase it. As the Economist puts it:Īs a general rule wealth grows faster than economic output, he explains, a concept he captures in the expression r > g (where r is the rate of return to wealth and g is the economic growth rate). In fact, Piketty is more concerned about how interest rates and the GDP growth rate affect income inequality. Furthermore, this is a particularly timely topic as many countries have recently passed high-cost stimulus packages and are shouldering greater debt burdens to cushion the economic fallout of the ongoing coronavirus pandemic. If a country’s GDP grows faster than the accrual rate of its debt, the thinking goes, the relative cost of servicing the debt will decline over time, so the debt is thought to be easily sustainable.īut that is not what Piketty actually says, and the difference matters a great deal. Ever since Thomas Piketty published his book on inequality, Capital in the Twenty-First Century, one of the clichés of economic and debt management seems to be the claim that national debt isn’t a problem if interest rates are less than the GDP growth rate.
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