Can we all be Japan?

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One of the biggest topics at this year’s Jackson Hole was Barry Eichengreen’s paper on how government debt was probably going to stay high forever.

At the time Alphaville’s interested was naturally more piqued by Darrell Duffie’s nerdier paper on Treasury market structure, but we have to admit that Eichengreen’s presentation — co-authored with the IMF’s Serkan Arslanalp — captures more of the zeitgeist.

Their basic argument is that public debt is going to be awfully difficult to whittle down meaningfully, even in the longer run, given political, financial and economic realities. Unrealistically difficult. So we should just all learn to live with debt.

Goldman Sachs’ economist team have decided to visit the same subject. The title of the report is “DM Debt – How to Move Mountains”, but the underlying theme is best summed up by the subhead “Can we all ‘be’ Japan?”

Sadly not, apparently. Here are their main bullet points:

– With public debt-to-GDP levels in developed markets at multi-decade highs, the recent rise in inflation and policy rates is refocusing attention on debt dynamics as interest costs increase and fiscal policy adjusts following the pandemic.

– Using a debt accounting exercise, we show that periods of sustained debt reduction are typically driven by strong primary balances and above-average growth. Following 1980, inflation has played little role in debt reductions.

– Current fiscal projections and current market interest rates on average do not point to declines in debt-to-GDP ratios across DMs. We estimate that market implied r – g, the difference between real interest rates and growth rates, is now positive for many countries.

– Japan provides an example of high debt peaceably coexisting with low interest rates. However, given current high inflation, wider deficits, and rising interest costs, we think it unlikely that we return to the era of structurally low interest rates in the US, UK or Europe. As a result, we see the risks to term premia skewed higher as fiscal risks simmer.

Anyway, since the report is public we thought we’d just direct you there rather than just say what they say, but with less fancy words. Enjoy.