1. In the world of social media, it is hard not to be pigeonholed as a dove or as a hawk (in this case on fiscal policy). People are confused if you are hawkish in some case, dovish in others. So, for the record:
2. I still believe in the importance of (r-g) and the fiscal and welfare implications of debt, and am, as a result, more relaxed than most (for example in discussing EU fiscal rules, or the debt situation in Europe). But:
3. I shall admit that there is more uncertainty about r* and thus r*-g than pre-Covid. Current US demand is stronger than expected. How much is the result of accumulated savings and good balance sheets and will go away, how much is more structural and durable, is uncertain.
4. There is also a chance that the fight against global warming leads to both higher investment and higher debt.
Putting things together, best guess is that r* will remain on average less than g, but with some non-zero probability that the inequality reverses.
5. The US primary deficits under current and likely extended policies are extremely large. While low or negative (r-g) helps with debt dynamics (@pkrugman argument), it is still the case that they imply large increases in the US debt to GDP ratio.
6. These are likely to eventually require a premium to get investors to hold them even if there is no risk, and if there is the slightest whiff of a risk, require an additional risk premium.
7. The MMT argument, again repeated in some tweets, that there is no problem because the Fed can buy the bonds, is a non-starter. Either the Fed indeed buys the bonds and issues money, and (given the size of the primary deficits), this likely results in high or hyperinflation.
8. Or (and this the likely outcome) the Fed remains independent and does not buy the bonds. The fact that the debt is in dollars, or that the Fed could have done something, is simply irrelevant.


1. I know I should not try to answer the MMT crowd. But I am told: Look at Japan. It shows that MMT is right. Deficits are large.The BOJ is buying bonds by the bundle, and yet no inflation. So three points (I know, it is complicated.Much easier to give categorical pithy answers):
2. When a central bank buys bonds and issues interest-paying reserves at an interest rate close to that on bonds (QE), then, to a first approximation, this has no effect on the balance sheet of the consolidated government, and:
3. It does not solve a sustainability problem if there was one. And, it does not by itself lead to high or hyperinflation.
The issue arises if a central bank finances the deficit by buying the new bonds and issues non-interest paying reserves.
4.Then, in so doing, it decreases the interest rate. If it issues a lot, the nominal interest rate goes to zero. If there is inflation, this means a very low real rate, lower than r*. A very low real rate means excess demand and higher (possibly higher and higher) inflation.
5. An exception to this conclusion is when r* itself is very low, so low that the zero lower bound binds. Then, even with the nominal rate at zero, demand remains insufficient to lead to full employment. In this case, there is no inflation pressure.
6. To a first approximation, purchases of bonds by the central banks are swaps of zero interest rate assets against other zero interest rate assets and have little implication for debt dynamics. This has, for a while, been the situation in Japan.