This report attempts to complete the background discussion on Ponzi public finance by assessing the question of who ultimately pays. However, financed, the debt accumulated by running a large deficit reflects a real resource transfer that has to come from somebody, either directly or in the form of an opportunity cost, as cash or production effort.
The evolving mainstream take, which I accept and have been pushing, is that the debt is ultimately paid for by savers who accept a negative real interest rate or – more precisely – a real interest rate that is lower than the economy’s trend real growth rate. At first approach, that take probably seems uncontroversial. But tension can arise when we dig into what is meant precisely by “pay” and “accept.”
Are the low interest rates that underly the logic of Ponzi finance a case of redistribution from the rentier to the pleb, via financial suppression and the like? The short answer to the question is no, at least within the model now being pressed by the mainstream. This report describes that perspective without fully arguing it. Along the way, it draws a contrast between the reasoning of Ponzi public finance and that of MMT, not to slag MMT (although I am not a fan), but just to illustrate the mainstream take through contrast.
Aside from being largely assertion, this report is a bit abstract and may seem somewhat argumentative and disconnected from investment strategy. I would accept the criticism, and admit that I have been provoked by some sloppy language from The Empire on Twitter. But there is a practical implication. The conditions underlying the case for Ponzi public finance arise much more from general equilibrium, including importantly the preferences of savers, than from fiat, particularly in macro. They are not a reflection of arbitrary political whim or fashion. Moreover, they mitigate, rather than reinforce, the distributional considerations arising out of that general equilibrium. So, spare us all the martyr complex, Wall Street sales guy!
An important implication of these forces being real rather than fiat is that they are likely to endure. This does not guarantee that policy makers will react optimally to these forces. We are seeing some hesitation on that front play out in the lame duck Congress now, which may lengthen the soft spot into which the US economy has recently entered. But the forces themselves should persist. If you already agree, you can easily skip this report.