This is the third part in a series that is responding to a nice post by my fellow Economonitor blogger, Ed Dolan. We’ve been discussing the sustainability of US federal budget deficits and debts. Because we agreed there is no question of “affordability” we’ve moved on to other issues surrounding sustainability. A common method is to look at the “mathematical sustainability” of the debt. Ed and I agree that it comes down to comparing the interest rate on government debt with the assumed growth rate of GDP.
To simplify, if the interest rate is higher than the economy’s growth rate, then the debt ratio rises continuously. OK, that sounds bad. (I think Ed and I disagree over the usefulness of this math exercise, but since so many economists think it is important, I’m addressing it in detail. In a later blog—probably next week—I’ll argue why I think the whole thing is a waste of time.) Let’s look at the determination of interest rates this week.Economonitor — Great Leap Forward
MMT AND MATH SUSTAINABILITY OF SOVEREIGN DEFICITS (Part 3): Who Sets the Interest Rate?
L. Randall Wray | Professor of Economics, UMKC
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